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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-19171
ICOS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 91-1463450
(State of incorporation) (I.R.S. Employer
Identification No.)
22021 - 20th Avenue S.E.
Bothell, Washington 98021
(425) 485-1900
(Address, including zip code, and telephone number, including area code, of
principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
State the aggregate market value of voting and non-voting stock held by non-
affiliates of the registrant as of March 26, 1999.
$1,489,109,168
Indicate the number of shares outstanding of each of the registrant's classes of
Common Stock as of March 26, 1999.
Title of Class Number of Shares
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Common Stock, $.01 par value 42,692,350
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the annual meeting
of stockholders to be held on May 6, 1999 relating to "Election of Directors,"
"Continuing Directors (until 2000)," "Continuing Directors (until 2001)," "Other
Executive Officers," "Compliance with Section 16(a) of the Securities Exchange
Act of 1934," "Compensation of Directors," "Executive Compensation," "1998
Option Grants," "1998 Option Exercises and Year-end Option Values,"
"Compensation Committee Interlocks and Insider Participation," "Employment
Contracts, Termination of Employment and Change of Control Arrangements,"
"Security Ownership of Certain Beneficial Owners and Management," and "Certain
Relationships and Related Transactions" are incorporated by reference in Part
III of this Form 10-K.
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ICOS CORPORATION
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TABLE OF CONTENTS
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Part I
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Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of
Security Holders
Part II
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Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Consolidated Financial Statements and Supplementary Data
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Part III
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Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV
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Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on
Form 8-K
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PART I
Item 1. Business
Overview
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ICOS Corporation ("ICOS" or the "Company"), formed in 1989, is developing
proprietary biopharmaceuticals and small molecule pharmaceuticals for the
treatment of inflammatory diseases and other serious medical conditions.
The Company's fundamental strategy is to identify and develop a significant
number of potential product candidates into breakthrough products with high
commercial potential. By understanding the underlying biochemical and
physiological mechanisms and identifying the cellular and molecular entities
involved in the disease process, ICOS is developing biopharmaceutical products
that address important opportunities in the treatment of chronic and acute
diseases that have inflammatory components as well as certain cardiovascular
diseases and cancer. Through this strategy, the Company believes it will be
able to develop novel therapeutics that are more selective and efficacious than
current therapeutics.
When used in this discussion, the words "believes," "intends," "anticipates,"
"plans to" and "expects" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. See "Important Factors Regarding Forward-Looking Statements."
Readers are cautioned not to place undue reliance on such forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to such forward-
looking statements that may be made to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
Long-Range Strategy
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The Company continues to develop a broad portfolio of potential product
candidates encompassing a wide variety of approaches to inflammatory conditions
and other serious diseases. Human disease is a complex and complicated process
involving many physiological and biological components. As such, the task of
developing therapeutics to treat these diseases is difficult and time-consuming.
A large number of potential product candidates are not successfully developed
because of the inability to prove that they are either safe or efficacious. In
order to compensate for this risk, the Company utilizes a strategy of developing
a number of approaches to the treatment of inflammatory conditions which
encompass a variety of mechanisms and approaches to the inhibition of
inflammation and other disease processes. Presently, the Company and its
affiliates have five product candidates in clinical trials including three
monoclonal antibodies: LeukArrest(TM), ICM3 and IC14, Pafase(TM), a recombinant
form of a naturally occurring human enzyme, and IC351, a small molecule product
candidate. In addition, the Company has several product candidates in the
research and preclinical phases of development. In 1998 the Company established
commercial names for two of its product candidates: LeukArrest(TM) is the name
presently given to the product candidate formerly known as Hu23F2G, a monoclonal
antibody developed by ICOS to block leukocyte cell adhesion in humans, and
Pafase(TM), formerly known as rPAF-AH, a potent proinflammatory mediator which
is a naturally occurring human enzyme that destroys platelet-activating factor
and eliminates its proinflammatory effects. Over the past few years the Company
has established certain corporate collaborations to enhance and optimize the
Company's development while maintaining substantial downstream product rights to
potential products and offsetting a substantial portion of the financial risk of
development of these product candidates. Most recently, during 1998 the Company
established Lilly ICOS LLC ("Lilly ICOS"), a joint venture with Eli Lilly and
Company ("Lilly"), to develop the small molecule product candidate known as
IC351 for the treatment of sexual dysfunction. This is in addition to the
Company's joint venture Suncos Corporation ("Suncos") established in 1997 with
Suntory Limited of Japan ("Suntory") for the development of Pafase(TM) and a
collaboration with Abbott Laboratories in the field of integrins and ICAMs. Each
of these collaborations is described in more depth in the section entitled
"Collaborations."
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Description of Programs
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Development Pipeline - Overview
The clinical targets that are the subject of ICOS' discoveries include
inflammation and other diseases whose pathology is a result of the dysfunction
of the normal cellular mechanisms. The Company has discovered important
molecules and mechanisms underlying directed cell adhesion, the inhibition of
proinflammatory mediators and intracellular signal transduction. The chart
below summarizes the programs with compounds currently in clinical development.
ICOS Clinical Development Projects
(Table 1)
<TABLE>
<CAPTION>
Product Candidate Indication Status (1)
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<S> <C> <C>
LeukArrest(TM) Ischemic stroke Phase 3 clinical trial
Hemorrhagic shock Phase 2 clinical trial
Myocardial infarction Phase 2 clinical trial
Multiple sclerosis, acute exacerbation Phase 2 clinical trial
ICM3 Severe psoriasis Phase 1/2 clinical trial
IC14 Severe sepsis Phase 1 clinical trial
Pafase(TM) ARDS Phase 2 clinical trial
Acute pancreatitis Phase 2 clinical trial
Post-ERCP pancreatitis Phase 2 clinical trial
IC351 Male erectile dysfunction Phase 2 clinical trial
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</TABLE>
(1) Status as of March 31, 1999
Phase 1 clinical trial: safety and pharmacology, dose-determining drug
regimen
Phase 2 clinical trial: determination of dose levels and potential
efficacy of drug
Phase 3 clinical trial: efficacy and safety determination
LeukArrest(TM)
Background
The migration of circulating leukocytes into extravascular tissues in the course
of inflammation involves a complex series of events. A critical step involves
the firm attachment of circulating leukocytes to the endothelial wall. The
CD11/CD18 family of cell adhesion molecules found on leukocytes mediate this
adhesive interaction. It is believed that by intervening in the adhesion
process, much of the inflammation-associated damage can be prevented.
Monoclonal antibodies directed to CD11/CD18 adhesion molecules have been shown
to protect against leukocyte-mediated tissue injury by blocking adherence in a
variety of disease models.
LeukArrest(TM) is a recombinant humanized monoclonal antibody developed by ICOS
to block CD11/CD18-mediated cell adhesion in humans. LeukArrest(TM) has been
shown to bind to CD11/CD18 cell adhesion molecules on the surface of leukocytes
and to block subsequent movement into the surrounding tissue. To date,
approximately 850 subjects have been enrolled in clinical trials of
LeukArrest(TM) investigating its use as a therapeutic for the treatment of
ischemic stroke, hemorrhagic shock, myocardial infarction and multiple
sclerosis. These trials are designed to gather safety, efficacy and
pharmacological data to support further development of the program. ICOS is
conducting clinical development of LeukArrest(TM) for the indications described
below.
Clinical Application - Ischemic Stroke
During an ischemic stroke a blood vessel in the brain becomes blocked and blood
flow to a region of the brain is reduced. This ischemia results in injury and
death of the affected tissue. Although the stroke event arises from the
blockage of one or more cerebral blood vessels by a blood clot, a significant
portion of the tissue injury and death is thought to be caused by neutrophil-
mediated inflammatory mechanisms. Restoring blood flow, oxygen and leukocytes,
in particular neutrophils, to these tissues results in activation and adhesion
of neutrophils to the endothelium. Once attached to the endothelial lining
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these activated neutrophils release toxins, such as free radicals and proteases,
that damage the endothelium and the surrounding tissue. Data from preclinical
studies has indicated that LeukArrest(TM) inhibits neutrophil functions shown to
be important for neutrophil-induced damage. The Company believes that treating
patients who have suffered a stroke with LeukArrest(TM) may limit the degree of
inflammatory tissue damage and protect significant amounts of brain and CNS
tissue and, thus, may decrease the extent of brain damage for these patients.
This molecule showed safety and efficacy in a randomized double-blind placebo
controlled parallel study. Data from this study suggests that high dosages of
LeukArrest(TM) improved neurological outcomes and exhibited a higher treatment
response rate than did placebo. LeukArrest(TM) is currently being evaluating in
a Phase 3 trial for ischemic stroke. This trial is designed to treat
approximately 800 subjects in a randomized double-blind placebo controlled
parallel study to evaluate its efficacy.
Clinical Application - Hemorrhagic Shock
Each year, approximately 150,000 Americans suffer major trauma and associated
blood loss, leading to shock. Approximately 125,000 of these victims are at
risk for the development of hemorrhagic shock. A major cause of morbidity and
mortality in those who survive the initial injury is multiple organ dysfunction,
for which there is no specific treatment. The intensive care necessary for the
support of these patients is extremely expensive.
Based on in vitro and in vivo data, it has been hypothesized that multiple organ
dysfunction is the result of neutrophil-mediated tissue injury. Resuscitation
of the trauma patient by medical staff administering intravenous fluids and
blood products leads to the re-establishment of circulation in the affected
tissues. Restoring blood flow, oxygen and leukocytes, in particular
neutrophils, to these tissues results in activation and adhesion of neutrophils
to the endothelium. Once attached to the endothelial lining these activated
neutrophils release toxins, such as free radicals and proteases, that damage the
endothelium and the surrounding tissue. The consequences of this include edema,
hemorrhage and thrombosis that can often result in organ dysfunction and
ultimately organ failure.
Since the adhesion of neutrophils to endothelial cells is inhibited by
LeukArrest(TM), ICOS believes that treatment of trauma-induced hemorrhagic shock
patients with LeukArrest(TM) may prevent the development of multiple organ
dysfunction and improve overall mortality rates.
LeukArrest(TM) is being evaluated in a randomized double-blind placebo
controlled parallel group Phase 2 study to evaluate LeukArrest(TM) for the
treatment of severe tissue damage related to severe trauma. The trial is
designed to evaluate the molecule's efficacy in reducing fluid requirements and
organ failure in patients that have suffered massive blood loss due to traumatic
injury. ICOS believes that blockage of leukocyte movement into tissues after re-
establishment of fluid levels may prevent resulting tissue damage and resulting
organ failure.
Clinical Application - Myocardial Infarction ("MI")
Each year, approximately 1.5 million myocardial infarctions occur in the United
States, resulting in significant morbidity and mortality. During an MI, a
coronary artery becomes blocked, impairing blood flow to a region of the heart
and damaging surrounding tissue. A significant portion of the tissue injury and
death is thought to be caused by neutrophil-mediated inflammatory mechanisms.
Current treatment of MI is unable to protect at-risk tissue from this
neutrophil-mediated damage.
A common and serious complication of MI is the failure of the heart to pump
blood adequately. Generally, the larger the amount of tissue damage, the less
able the heart is to pump blood, resulting in congestive heart failure, which is
the major cause of in-hospital mortality and disability following MI.
Preclinical studies have provided evidence that LeukArrest(TM) inhibits
neutrophil functions shown to be important for neutrophil damage in models of
MI. ICOS believes that treating patients with LeukArrest(TM) during an MI may
limit the degree of inflammatory tissue damage and protect significant amounts
of heart tissue. In turn, this tissue preservation should help maintain the
pumping capacity of the heart, thereby reducing mortality and disability.
LeukArrest(TM) is currently being evaluated for its use in preventing tissue
damage after myocardial infarction or heart attack, in an acute setting.
Initially, the molecule's safety and pharmacology profile was tested in a
randomized double-blind placebo controlled parallel Phase 2 study involving 60
patients at 18 sites. Results of this initial study indicated that both
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doses of LeukArrest(TM) were well tolerated. Based on these results, a Phase 2
randomized double-blind placebo controlled parallel study was initiated and is
currently underway.
Clinical Application - Multiple Sclerosis ("MS") - Acute Exacerbation
Multiple sclerosis is characterized by destruction of the myelin sheath
(demyelination) surrounding the nerve cells in the central nervous system. This
destruction leads to a variety of diverse neurologic deficits. It is believed
that the demyelination process is associated with an inappropriate inflammatory
response and subsequent migration of blood-borne leukocytes into the central
nervous system where few leukocytes are normally found. Once in the central
nervous system, these leukocytes are believed to damage the myelin sheath
surrounding nerve cells.
Current treatment for acute exacerbation of MS consists of systemic
administration of corticosteroids, usually initiated as intravenous therapy for
the first few days of the exacerbation, followed by a course of oral steroid
therapy. Other approved treatments include two different forms of interferon-
beta for treating relapsing remitting MS by reducing the frequency of acute
attacks. Despite the medical advance represented by the approval of
betainterferon, there remains a significant need for therapy to treat acute
exacerbations of MS.
LeukArrest(TM) may reduce the severity and length of recurrent MS exacerbations
by interfering with the ability of leukocytes to bind to the vascular
endothelium in the brain and spinal cord, thus limiting their movement into
these tissues. Treatment of the acute exacerbation with LeukArrest(TM) may
provide superior treatment outcomes to other treatment methods.
During 1998, the Company completed a Phase 2 study evaluating a single dose of
LeukArrest(TM) at two different dose levels for the treatment of acute
exacerbations of multiple sclerosis. Results of this study indicated that
LeukArrest(TM) did not show clinical benefit in comparison with
methylprednisolone. Additionally, methylprednisolone had a benefit over all
other groups when patients were evaluated on the basis of their neurological
function. This trial did demonstrate that subjects treated with LeukArrest(TM)
showed no difference in severe acute events or infection rates as compared to
placebo. A Phase 2 study evaluating LeakArrest(TM) as a treatment for acute
exacerbations of MS when given in a multiple dose regimen was concluded in late
1998. Data from this trial is anticipated to be available during 1999.
ICM3
Background
T-cell stimulation by antigen presenting cells is one of the early events in the
immune response that leads to inflammation. ICAMs are cell surface proteins
known to mediate the interaction between T-cells and antigen presenting cells.
Known ICAMs include ICAM-1, ICAM-2 and ICAM-3. In comparison to the other
ICAMs, the expression pattern of ICAM-3 has been shown by ICOS scientists to
differ from the sites of expression on ICAM-1 and ICAM-2. Whereas ICAM-1 and
ICAM-2 are primarily found on the surfaces of endothelial cells and activated
leukocytes, ICAM-3 expression is normally restricted to leukocytes themselves.
Because ICAM-3 is expressed at high levels independent of the state of cell
activation, ICAM-3 is believed to be involved in the earliest stages of T-cell
activation and is therefore an attractive target for early intervention to
improve the outcome in T-cell-mediated inflammatory conditions. A proprietary
series of anti-ICAM-3 antibodies developed by ICOS has been shown to inhibit T-
cell activation. One antibody, known as ICM3, is a recombinant humanized
monoclonal antibody that has been shown by ICOS scientists to block ICAM-3 and
function as an inhibitor of T-cell activation in both in vitro and clinical
models.
Clinical Application - Psoriasis
One common inflammatory disorder that involves T-cell stimulation is psoriasis.
Approximately 20% of the five million Americans suffering from psoriasis have a
moderate or severe form of the disease that is not responsive to topical
therapy. ICOS is currently testing ICM3 in a series of Phase 2 studies of
patients with moderate to severe psoriasis to evaluate the compound's safety and
pharmacology. These 2 trials come at the conclusion of a Phase 1 study
evaluating the molecule's use in treating patients with mild to severe
psoriasis. The Phase 1 trial was designed as a single-dose trial of ICM3 to
evaluate the molecule's safety and pharmacology.
Crohn's disease has been selected as a second potential indication for ICM3 and
Phase 1 clinical trials are now being planned.
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IC14
Background
Immediately after exposure to bacteria, monocytes, granulocytes, and endothelial
cells in human and animal tissues recognize and respond to the invading
microorganisms in a non-adaptive or "innate" manner. This innate recognition of
bacteria is mediated by CD14, a protein expressed on the surface of myeloid
cells and present in plasma. In cases of localized infection, CD14 triggers a
localized inflammatory cascade that promotes bacterial killing at the site of
infection. However, in cases of systemic exposure to bacteria, CD14 triggers a
systemic inflammatory cascade that may lead to potentially life-threatening
conditions including the systemic inflammatory response syndrome ("SIRS"),
septic shock, and multiple organ dysfunction syndrome ("MODS"). The pivotal
role that CD14 plays in recognition and response to bacteria makes it an
attractive target for potential therapeutic intervention in cases of suspected
bacteremia and endotoxemia. IC14 is a monoclonal antibody that binds to CD14
and blocks its interaction with bacterial endotoxins.
Clinical Application - Severe Sepsis
Bacterial recognition by CD14 and subsequent signal transduction through TLR-2
triggers a vigorous response by myeloid and endothelial cells that promote
bacterial killing at the site of infection. Once activated, these cells
upregulate the expression of adhesion molecules on their surfaces and release a
number of proinflammatory cytokines, lipid mediators, and coagulation factors.
When confined to a local tissue site, this complex response functions to
eliminate invading bacterial microorganisms. Unfortunately, however, the innate
response that promotes bacterial killing in the setting of a localized infection
can lead to catastrophic clinical manifestations in cases of bacteremia.
Recent strategies to interfere with the innate systemic response to infection
have targeted various proinflammatory mediators, as well as the Gram-negative
bacterial envelope component LPS. To date, these strategies have met with
limited success. For example, monoclonal antibodies and soluble receptors that
target TNF-a have failed to reduce 28 day all cause mortality in pivotal
clinical trials. Monoclonal antibodies targeting LPS have also failed. In
retrospect, the failure of these strategies may not be entirely unexpected.
Although the strategies mentioned target important components of the innate
response, the components they target are redundant. For example, TNF-a is one
of many proinflammatory mediators released by immune effector cells. Similarly,
LPS is one of many bacterial envelope components capable of triggering the
innate response.
In contrast to other potential therapeutic targets, CD14 does not appear to be a
redundant component of the innate response. Other proteins which recognize
bacterial envelope components have been identified including bactericidal
permeability increasing factor (BPI) and LPS binding protein (LBP). However,
these proteins only recognize LPS. Macrophage scavenger receptors do exhibit
specificity for a variety of bacterial components. However, these receptors do
not participate in cell activation. In fact, CD14 is the only known receptor
for bacterial envelope components that is capable of directly participating in
cell activation and inflammatory mediator release. CD14 not only recognizes a
diverse array of bacterial envelope components, it is directly involved in
activation of multiple cell types including monocytes, macrophages,
granulocytes, endothelial cells, epithelial cells, vascular smooth muscle cells,
and astrocytes. CD14's diverse specificity for bacterial components, and its
unique ability to trigger activation of multiple cell types, potentially make it
an attractive target for blocking the innate systemic response to infection.
IC14 has been shown to block these responses in both in vitro and in vivo
models.
In 1999, the Company announced the initiation of a Phase 1 clinical trial in
healthy volunteers to evaluate the safety of IC14 in humans.
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Pafase(TM)
Background
Platelet-activating factor ("PAF") is a potent proinflammatory mediator with
diverse biological effects and is implicated in a number of debilitating
inflammatory conditions, including ARDS, acute pancreatitis, asthma and
necrotizing enterocolitis. It is produced naturally by a variety of human
cells, including endothelial cells, leukocytes, platelets and mast cells. PAF
affects a variety of cells that are involved in the inflammatory process,
including leukocytes, platelets and vascular endothelial cells, and acts by
binding to specific receptors, thereby increasing the inflammatory response.
Platelet-activating factor acetylhydrolase is a naturally occurring enzyme that
destroys PAF and eliminates its proinflammatory effects. ICOS is developing
Pafase(TM), the recombinant form of PAF-AH, as an agent for the treatment of
diseases characterized by increased PAF activity.
In 1997, the Company formed Suncos to facilitate development and
commercialization of Pafase(TM) for use worldwide. See "Collaborations."
Clinical Application - Acute Respiratory Distress Syndrome ("ARDS")
ARDS is a complication of acute lung inflammation associated with several
clinical conditions, including acute pancreatitis, massive blood transfusion,
septic shock, and trauma. There are approximately 650,000 persons at risk for
developing ARDS each year in the United States and of these, approximately
150,000 develop ARDS, for which the mortality rate is approximately 40-50%.
Current therapy for ARDS is supportive.
Pafase(TM) may be effective in patients at risk for ARDS or in improving the
outcome in patients who have already been diagnosed with ARDS by inhibiting the
ability of PAF to contribute to lung inflammation. In 1997 and early 1998, the
Company evaluated Pafase(TM) in subjects with trauma and severe sepsis who were
at risk to develop ARDS. The initial trial was designed to determine the safety,
pharmacology and efficacy of Pafase(TM). Pafase(TM) proved to be well tolerated
at all dose levels and patients who received Pafase(TM) showed improvement in
several efficacy parameters compared to patients who received a placebo. As a
result of the data from this trial, a Phase 2 clinical trial was initiated in
1998 and is ongoing to further evaluate the safety and efficacy in subjects with
trauma and severe sepsis who are at risk to develop ARDS.
Clinical Application - Pancreatitis
Each year, approximately 40,000 people in the United States suffer from acute
pancreatitis. Currently, there is no specific therapy approved to treat this
disease. PAF has been implicated as a mediator of acute pancreatitis. In
preclinical models, Pafase(TM) has been demonstrated to reduce the severity of
pancreatitis. A Phase 2 study of patients suffering from severe acute
pancreatitis is planned to begin in 1999. This study will evaluate two dose
levels of Pafase in comparison to placebo and is designed to measure Pafase's
safety and efficacy and measure the compound's use to reduce the effects of
pancreatitis.
An additional Phase 2 safety and efficacy study is underway in patients at risk
to develop acute pancreatitis after ERCP (endoscopic retrograde
cholangiopancreatography). This randomized double-blind placebo controlled
parallel study is designed to evaluate two dose levels of Pafase(TM) versus
placebo in a single dose setting.
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IC351
Background
Research over the past 15 years has led to a better understanding of how cells
interact to coordinate the growth and maintenance of tissues in the human body.
The key to this interaction is intracellular signal transduction -- the
transmission of a signal from the exterior to the interior of a cell -- which
results in the activation or suppression of specific genes or metabolic
pathways.
Physiologically, the concentrations of two second messenger molecules, cAMP and
cGMP, influence a wide range of cellular functions. The intracellular
concentration of cAMP and cGMP in the cell is generally controlled by the
relative activity of two types of enzymes: Cyclases, which produce these second
messengers, and phosphodiesterases or PDEs, which inactivate these second
messengers.
There are at least 19 human genes that encode more than 40 different PDEs that
can be categorized into ten distinct PDE types. The Company has cloned and
expressed a majority of these PDEs, each of which has been shown to target
particular signal transduction pathways. These diverse proteins are not,
however, uniformly expressed and distributed throughout the body, but rather are
found in differing concentrations in different tissues and cells. This tissue-
selective expression may provide opportunities for specific intervention and
development of selective therapeutics that inhibit a single type of PDE enzyme.
Clinical Application - Male Erectile Dysfunction
IC351, a small molecule compound, which is a PDE5 modulator, is being evaluated
for the treatment of male erectile dysfunction ("MED"), also called impotence,
which is estimated to effect between 10-20 million men in the United States.
This condition can be the consequence of several underlying factors that coexist
in patients with MED. PDE5 is part of the signal transduction system in
vascular smooth muscle that acts to control the level of cGMP. IC351 is a
potent and selective blocker of PDE5 function. When a guanylyl cyclase in the
vascular smooth muscle cell has been triggered to produce cGMP by an external
signal, IC351, blocks this PDE and prevents the PDE5 from destroying the cGMP.
Thus, IC351 can be thought of as a contingent agonist, a compound whose action
is contingent upon the presence of a signal triggering a cGMP increase.
Administration of IC351 is expected to increase cGMP in the vascular smooth
muscle leading to vessel relaxation and increased blood flow in response to
stimuli.
During 1998 several Phase 2 studies were completed to evaluate the safety and
efficacy of IC351 in mild to moderate MED. To date the results of three Phase 2
studies of patients with mild to moderate MED have been announced.
The compound is being developed by the Company's 50% owned joint venture Lilly
ICOS formed in the fourth quarter of 1998. See "Collaborations." Lilly ICOS will
develop and globally commercialize IC351 for the treatment of both male and
female sexual dysfunction.
Research and Discovery Program
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The Company's scientists are also working to identify and develop biological and
synthetic small molecule-based therapeutics designed to exploit the Company's
knowledge of the mechanisms of inflammation. The Company has developed a
proprietary in-house, high-throughput small molecule screening program. ICOS has
assembled an extensive library of chemicals, consisting of synthetic organic
molecules, through its collaborations and independent compound acquisitions.
This library has been used successfully to identify potential drug candidates
for a number of molecular targets within the Company's research and development
programs.
In addition, the Company has identified a number of molecular and biological
pathways of inflammation and physiological mechanisms important in disease
conditions. The Company is developing a wide variety of biological therapeutic
agents and drug candidates which show promise as potential products.
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Clinical Production Facility
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The Company has manufactured recombinant protein-based clinical materials to
support its previous and current clinical trials in its own production facility.
This facility is capable of utilizing both microbial and mammalian-based
production processes and was designed to meet Food and Drug Administration
("FDA") requirements for the production of marketable products. The facility is
suited for the production of purified recombinant protein bulk product. As
such, the Company anticipates that vialing and other finishing steps will be
completed under contract with other companies. The Company does not have the
facilities necessary for production of small molecule drugs including IC351. As
such, the Company contracts with other companies for the production of IC351.
See "Important Factors Regarding Forward-Looking Statements."
Collaborations
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The Company has entered into arrangements with other parties to access
technology and facilitate and fund the development and marketing of certain of
its products.
In April 1995, the Company formed a collaboration with Abbott Laboratories that
seeks to discover small molecule drugs that modulate the intracellular signaling
connections of certain ICAMs and integrins. In September 1997, ICOS and Abbott
Laboratories expanded and extended their relationship to include small molecule
antagonists of the extracellular domains of certain integrins and ICAMs. The
research program under which ICOS receives research funding from Abbott
Laboratories is scheduled to end April 1, 1999. Under the terms of the
agreement, each company will have exclusive rights to drugs against specific
molecular targets with royalties and milestone obligations to the other party.
Each party will be responsible for the development, registration and
commercialization of its own products. In addition, the collaboration provided
the Company with a library of chemical compounds for use in its own discovery
programs.
In February 1997, the Company and Suntory as joint venture partners formed
Suncos to develop and commercialize Pafase(TM) worldwide. Under the terms of the
arrangement, the joint venture was established with a $30 million cash
investment by Suntory to Suncos. ICOS licensed, on a worldwide basis, all rights
for Pafase(TM) to Suncos. In exchange, both ICOS and Suntory received 50%
ownership in Suncos. Suntory has rights and has agreed to participate in the
development and commercialization of Pafase(TM) in Japan and ICOS has similar
rights and has agreements with respect to the United States. Suncos will be
managed jointly by Suntory and ICOS. Suntory and ICOS will each pay royalties to
Suncos on sales of Pafase(TM) products in its respective territory.
In October 1998, Lilly ICOS was formed to develop and globally commercialize
phosphodiesterase type 5 (PDE5) inhibitors as oral therapeutic agents for the
treatment of both male and female sexual dysfunction. Under the terms of the
joint venture agreement, the Company received a $75.0 million payment in October
and could receive future success milestone payments based on the progression of
IC351 through development. The joint venture is being capitalized by Lilly
through cash infusions and the contribution by the Company of intellectual
property associated with IC351 and its research platform. The joint venture will
market products resulting from this collaborative effort in North America and
Europe. For countries outside North America and Europe, products will be
licensed exclusively to Lilly for commercialization with a royalty paid to the
joint venture.
From time to time, the Company enters into research collaborations with various
institutions and scientists to expand ICOS' access to new scientific
developments, technologies and discoveries in certain areas. ICOS has
contracted with several academic, corporate and institutional collaborators to
conduct certain research and development activities relating to the products
discussed herein. The Company has also entered into certain license agreements
with respect to different technologies in addition to the agreements noted
above. ICOS' agreements with these organizations generally provide that the
Company will fund either the research or development of the technology, or both,
and will obtain an exclusive license or option to the technology developed,
subject to certain royalty and other obligations.
Research, Product Development and Commercialization Strategies
- --------------------------------------------------------------
ICOS' research and product development efforts comprise three basic stages prior
to commercialization. The initial stage, research, includes early-stage
discoveries through the identification of preclinical targets. During research,
the Company tests candidate molecules in relevant preclinical models of disease.
During the preclinical stage a specific preclinical target is selected and the
research and development project personnel work to establish a production
process. After review of the Investigational New Drug ("IND") application by
the FDA, Phase 1 clinical trials are commenced to determine a product
candidate's safety and pharmacological profile. The Company's Phase 1 clinical
trials are frequently designed to support the initiation of multiple Phase 2
clinical trials for distinct indications. Phase 1 safety and pharmacology
clinical trials lead to
10
<PAGE>
Phase 2 clinical trials designed to establish the likely therapeutic dose and
potential efficacy. ICOS' product development strategy emphasizes the
acquisition of Phase 2 clinical data to determine a particular product
candidate's utility in a specific disease indication. A drug candidate may then
enter Phase 3 clinical trials, where its efficacy will be verified through
additional human clinical trials. Once Phase 3 clinical trials are successfully
completed, a Biological License Application ("BLA"), or New Drug Application
("NDA") for small molecule products, is submitted to the FDA. Product launch and
commercialization depend on approval of the BLA or NDA by the FDA. See
"Governmental Regulation."
The Company intends to select specific indications for potential products that
merit study in Phase 3 clinical trials with a view to full commercialization
based on data generated from relevant preceding clinical work and ICOS' analysis
of the best utilization of its resources. The Company does not expect to
conduct Phase 3 clinical trials on all the potential indications for its
products.
The Company plans to develop the capabilities necessary to bring the promising
products of its research and development activities into the marketplace. If the
Company determines that it is strategically advantageous to enter into a
collaboration with another firm, the Company's preference is to enter into
collaborations with companies where ICOS has the opportunity to share equally in
research and product development and co-promote and share profits from any
products arising from the collaboration. The Company may, however, choose to
license its technology when it is in the Company's best interest. There can be
no assurance that additional joint venture or collaborative arrangements will be
available on terms acceptable to the Company. See "Collaborations."
To support the clinical development of LeukArrest(TM), Pafase(TM) and ICM3 (the
"Partnership Products"), ICOS formed, and transferred certain of its rights to
the Partnership Products to ICOS Clinical Partners, L.P. (the "Partnership").
The Partnership completed the sale to private investors of interests in the
Partnership in August, 1997. This sale results in net proceeds to the
Partnership of approximately $79.8 million over a three year period to fund
continued development by the Company of the Partnership Products. ICOS has the
option to purchase all of the limited partnership interests in the Partnership.
The Company's research and development expenses during 1998, 1997 and 1996 were
$77 million, $42.8 million, and $30.0 million, respectively.
Competition
- -----------
Competition in the pharmaceutical industry is intense and characterized by rapid
technological development. The Company, Suncos, and Lilly ICOS will compete with
pharmaceutical companies and biotechnology firms in the United States, Japan,
Europe and elsewhere. Many biotechnology companies have focused their
development efforts in the human therapeutics area, including inflammatory and
other diseases targeted by the Company, and many major pharmaceutical companies
have developed or acquired internal biotechnology capabilities or have made
commercial arrangements with other biotechnology companies or research
institutions.
The Company expects to encounter significant competition for the products it
plans to develop on its own and through its joint ventures. Companies that
complete clinical trials, obtain required regulatory approvals and commence
commercial sales of their products before their competitors may achieve a
significant competitive advantage. A number of biotechnology and pharmaceutical
companies are developing products aimed at the same indications as those ICOS
has targeted. Some of these have entered clinical trials or are commercially
available. Several have been in business longer than ICOS, have greater
financial resources and have more experience in obtaining and negotiating with
corporate partners. There can be no assurance that research and discoveries by
others will not render the Company's programs or products uneconomical or result
in therapies superior to any therapy developed by the Company or that any of the
Company's products will be preferred to any existing or newly developed
technologies.
Significant levels of biotechnology research occur in universities and other
nonprofit research institutions. These entities have become increasingly active
in seeking patent protection and licensing revenues for their research results.
They also compete with ICOS in recruiting skilled scientific talent.
The Company believes that its competitive success will be based on the ability
to create and maintain scientifically advanced technology, develop cost-
effective proprietary products, attract and retain talented and skilled
personnel, obtain patent or other protection for its products, obtain required
regulatory approvals and manufacture and successfully market its products,
either alone or through outside parties. Many of the Company's competitors have
substantially greater financial, marketing and human resources and experience
than ICOS. See "Important Factors Regarding Forward-Looking Statements."
11
<PAGE>
Governmental Regulation
- -----------------------
Regulation by governmental authorities in the United States, Europe, Japan and
other foreign countries is a significant factor in the manufacture and marketing
of the Company's potential products and in its ongoing research and product
development activities. Virtually all the Company's products, those of Suncos,
those of Lilly ICOS and those licensed to the Partnership will require
regulatory approval by governmental agencies prior to commercialization. In
particular, human therapeutic products are subject to rigorous preclinical and
clinical testing and other approval requirements by the FDA and comparable
agencies in foreign countries. The time required for completing such testing and
obtaining such approvals is uncertain. Any delay in clinical testing may delay
product development. In addition, delays or rejections may be encountered based
on changes in FDA or foreign regulatory policy during the period of product
development and testing. Various federal statutes and regulations also regulate
the manufacturing, safety, labeling, storage, record-keeping and marketing of
such products. The lengthy process of obtaining regulatory approvals and
ensuring compliance with appropriate federal statutes and regulations requires
the expenditure of substantial resources. Any delay or failure by ICOS or its
collaborators or corporate partners to obtain regulatory approval could
adversely affect the commercialization of products being developed by the
Company or its joint ventures, the Company's ability to receive product,
collaborative research or royalty revenue and, thus, its liquidity and capital
resources.
Preclinical studies are generally conducted in the laboratory to evaluate the
potential efficacy and the safety of a therapeutic product. The results of
these studies are submitted to the FDA as part of an IND application, which must
be reviewed by FDA personnel before clinical testing can begin. Once the FDA is
satisfied with the submission, the clinical trials in human subjects can
commence. Typically, clinical evaluation involves three sequential phases,
which may overlap. During Phase 1, clinical trials are conducted with a
relatively small number of subjects to determine the early safety profile of a
drug, as well as the pattern of drug distribution and drug metabolism by the
subject. In Phase 2, trials are conducted with groups of patients afflicted by
a specific target disease to determine preliminary efficacy, optimal dosages,
and dosage tolerance and to gather additional safety data. In Phase 3, large-
scale, multicenter comparative trials are conducted with patients afflicted with
a specific target disease to provide data for the statistical proof of efficacy
and safety as required by the FDA and others. The FDA, the clinical trial
sponsor or the investigator may suspend clinical trials at any time if it
believes that clinical subjects are being exposed to an unacceptable health
risk.
The results of preclinical and clinical testing are required to be submitted to
the FDA in the form of an NDA for small molecule products or a BLA for
biological products. In responding to an NDA or BLA, the FDA may grant
marketing approval, request additional information, or deny the application if
the FDA determines that the application does not satisfy its regulatory approval
criteria. There can be no assurance that approvals will be granted on a timely
basis, if at all. The failure to obtain timely permission for clinical testing
or timely approval for product marketing would materially affect the Company.
Product approvals may subsequently be withdrawn if compliance with regulatory
standards is not maintained or if problems are identified after the product
reaches the market. The FDA may require testing and surveillance programs to
monitor the effect of a new product and may prevent or limit future marketing of
the product based on the results of these postmarketing programs.
Some of the Company's potential products may qualify as orphan drugs under the
Orphan Drug Act of 1983. This act generally provides incentives to
manufacturers to undertake development and marketing of products to treat
relatively rare diseases or diseases where fewer than 200,000 persons annually
in the United States would be likely to receive the treatment. A drug that
receives orphan drug designation by the FDA and is the first product to receive
FDA marketing approval for its product claim is entitled to a seven-year
exclusive marketing period in the United States for that product claim. A drug
that is considered by the FDA to be different from a particular orphan drug is
not barred from sale in the United States during such seven-year exclusive
marketing period.
The Company's policy is to conduct its research activities in compliance with
the National Institute of Health Guidelines for Research Involving Recombinant
DNA Molecules. The Company is also subject to various federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory and manufacturing practices, the experimental use of animals and the
use and disposal of hazardous or potentially hazardous substances, including
radioactive compounds and infectious disease agents, used in connection with the
Company's work. The extent and character of governmental regulation that might
result from future legislation or administrative action cannot be accurately
predicted. See "Important Factors Regarding Forward-Looking Statements."
12
<PAGE>
Patents and Trade Secrets
- -------------------------
Because of the length of time and expense associated with bringing new products
through development and the governmental approval process to the marketplace,
the pharmaceutical industry has traditionally placed considerable importance on
obtaining and maintaining patent protection for significant new technologies,
products and processes. This is equally true for emerging biotechnology
companies and, as such, the Company has applied, and is applying, for patents
for its products and certain aspects of its technologies. To date, the Company
has filed over 160 U.S. patent applications on its own behalf or on behalf of
its exclusive licensors. The United States Patent and Trademark Office (the
"USPTO") has issued patents to ICOS for 75 of these applications.
The enforceability of patents issued to biotechnology and pharmaceutical firms
is highly uncertain. Federal court decisions indicating legal considerations
surrounding the validity of patents in the field are in transition, and there
can be no assurance that the historical legal standards surrounding questions of
validity will continue to be applied or that current defenses as to issued
patents in the field will, in fact, be considered substantial in the future. In
addition, there can be no assurance as to the degree and range of protection any
patents will afford, whether patents will issue or the extent to which the
Company will be successful in not infringing patents granted to others. If
certain patents issued to others are upheld or if certain patent applications
filed by others are issued as patents and are upheld, the Company may be unable
to market a product or may be required to obtain a license to do so. ICOS has
entered into nonexclusive license agreements, and anticipates entering into
additional license agreements in the future, with third parties for technologies
that may be useful or necessary for the manufacture of the Company's products.
The Company believes that such additional licenses will be available on
commercially reasonable terms. The Company has initiated discussions with
commercial entities which hold United States patents which may be needed for
some of the Company's activities. There can be no assurance that such licenses,
if required, will be available on acceptable terms, if at all.
While ICOS pursues patent protection for products and processes where
appropriate, it also relies on trade secrets, know-how and continuing
technological advancement to develop and maintain its competitive position. The
Company's policy is to have each employee enter into an agreement that contains
provisions prohibiting the disclosure of confidential information to anyone
outside the Company. Research and development contracts and relationships
between the Company and its scientific consultants provide access to aspects of
the Company's know-how that is protected generally under confidentiality
agreements with the parties involved. There can be no assurance, however, that
these confidentiality agreements will be honored or that the Company can
effectively protect its rights to its unpatented trade secrets. Moreover, there
can be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets. See "Important Factors Regarding Forward-Looking
Statements."
Human Resources
- ---------------
As of December 31, 1998, ICOS employed 312 individuals. Approximately 279 ICOS
employees are engaged in research or development activities and 33 in general
and administrative positions. ICOS considers its employee relations to be good.
Important Factors Regarding Forward-Looking Statements
- ------------------------------------------------------
The following important factors, among others, could cause actual results to
differ materially from those contained in forward-looking statements made in
this report and presented elsewhere by management from time to time. Beside ICOS
Corporation, references to the Company in this section also include its
subsidiary, Suncos, Lilly ICOS and the Partnership.
Early Stage of Development; Lack of Commercial Products; No Assurance of
Successful Product Development. The Company has not yet completed the
development of any products and does not expect to have any products
commercially available for several years, if at all. The Company's potential
products will require significant additional development, preclinical and
clinical testing, regulatory approval and additional investment prior to
commercialization. There can be no assurance that further research and
development will be successful or will result in therapeutic products that will
qualify for approval or be approved by regulatory authorities in order for
commercial sales to begin.
13
<PAGE>
Uncertainty Associated With Clinical Testing. Results of initial preclinical
and clinical testing of products under development by the Company are not
necessarily predictive of results that will be obtained from subsequent or more
extensive preclinical and clinical testing. There can be no assurance that
clinical trials of Company products under development will be completed or will
demonstrate the products' safety and efficacy. The failure to adequately
demonstrate safety and efficacy could significantly delay or prevent regulatory
approval of a product. There can be no assurance that unacceptable toxicities
or side effects will not occur at any time in the course of human clinical
trials or commercial use of the Company's products. The appearance of any such
unacceptable toxicities or side effects could cause the Company to interrupt,
limit, delay or abort the development of any of its products or, if previously
approved, necessitate their withdrawal from the market. Furthermore, there can
be no assurance that disease resistance or other physiological factors will not
limit the efficacy of the Company's products. Delays in patient enrollment in
the Company's current clinical trials or future clinical trials may result in
increased costs, program delays or both, which could have a material adverse
effect on the Company.
Continuing Operating Losses. The Company has not generated revenues from the
commercialization of any products. The Company anticipates that its operating
expenses and capital expenditures will increase significantly in 1999 and
subsequent years and expects to incur substantial operating losses at least
until sales of its potential products commence. The development of the
Company's products will require the commitment of substantial resources to
conduct the time-consuming research, preclinical development and clinical trials
necessary to bring such products to market and to establish production and
marketing capabilities. There can be no assurance that the Company will
generate significant product revenues or achieve profitability.
Additional Financing Requirements and Access to Capital. Substantial additional
funding will be required for the Company's operations. The Company may seek
additional funding through public or private financings, including equity
financings, and through other arrangements, including collaborative
arrangements. Adequate funds may not be available when needed or on terms
acceptable to the Company. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate expenditures for certain of its
programs or to license third parties to commercialize products or technologies
that the Company would otherwise seek to develop or commercialize itself.
Dependence on Others. Under the Company's collaborative agreements with Abbott
Laboratories, which is scheduled to end April 1, 1999, certain development
efforts, regulatory compliance, manufacturing and marketing activities may be
performed primarily by Abbott Laboratories. Similarly under the Company's joint
ventures with Suntory and Lilly, certain development and manufacturing
activities and regulatory and marketing activities related to product sales may
be performed by Suntory and Lilly. The Company may enter into similar agreements
with other collaborators in the future. Continued collaborator participation
will depend not only on the achievement of research objectives by the Company
and its collaborators, which cannot be assured, but also on each collaborator's
own financial, competitive, marketing and strategic considerations, which are
outside the Company's control. Such strategic considerations may include the
relative advantages of alternative products being marketed or developed by
others, including relevant patent and proprietary positions. There can be no
assurance that the interest and motivations of the Company's collaborators are,
or will remain, consistent with those of the Company or that such collaborators
will successfully perform their development, regulatory compliance,
manufacturing or marketing functions and that such current or future
collaborations will continue. Furthermore, there can be no assurance that the
Company will be able to negotiate additional acceptable collaborative
arrangements in the future or that any such arrangements would be successful.
Uncertain Availability of Third-Party Reimbursement and Product Pricing. The
Company's ability to commercialize products successfully will depend
substantially on reimbursement of the costs of such products and related
treatments at acceptable levels from government authorities, private health
insurers and other organizations, such as health maintenance organizations
("HMOs"). There can be no assurance that reimbursement in the United States or
foreign countries will be available for any products the Company may develop or,
if available, will not be decreased in the future, or that reimbursement amounts
will not reduce the demand for, or the price of, the Company's products, thereby
adversely affecting its business.
Third-party payors are increasingly challenging the prices charged for medical
products and services. Also, the trend toward managed healthcare in the United
States and the concurrent growth of organizations, such as HMOs, which can
control or significantly influence the purchase of healthcare services and
products, as well as legislative proposals to reform healthcare or reduce
government insurance programs, may result in lower prices for therapeutic
products. The cost-containment measures that healthcare providers are
instituting, including practice protocols and guidelines and clinical pathways,
and the effect of any healthcare reform, could materially adversely affect the
Company's ability to sell products if successfully developed and approved.
Moreover, the Company is unable to predict what additional legislation or
regulation, if any, relating to the healthcare industry or third-party coverage
and reimbursement may be enacted in the future or what effect such legislation
or regulation would have on the Company's business.
14
<PAGE>
Limited Manufacturing Capabilities; No Marketing or Sales Capability. The
Company currently anticipates the need to hire additional personnel skilled in
the manufacturing, clinical testing and regulatory compliance processes. There
can be no assurance that the Company will be able to acquire such resources or
establish relationships with others to supplement its resources. The Company
may not have sufficient manufacturing capacity to manufacture its potential
biological products in commercial quantities. Moreover, the Company's
manufacturing capacity may be inadequate to complete all clinical trials
contemplated by the Company. Although the Company expects to develop such
capacity by expanding its current facilities, building new facilities or
contracting with others for manufacturing services, there can be no assurance
that such capacity will be developed or be available on a timely basis. The
Company does not have facilities for the manufacture of small molecule products.
Should the Company decide to market certain of its potential products through a
direct sales force in certain markets, if and when regulatory approval is
obtained, the Company would be required to either hire a sales force with
expertise or contract with a third party to provide a sales force. There can be
no assurance that the Company will be able to establish such a sales force or be
successful in establishing other channels for distributing its potential
products.
Uncertainty Relating to Patents and Proprietary Rights. The Company's ability
to compete effectively with others is materially dependent on the proprietary
nature of the Company's patents and technologies. The Company has applied and
will continue to apply for patents for its products and certain aspects of its
technology, products and processes. The enforceability of certain patents
issued to biotechnology and other firms is highly uncertain. Federal court
decisions indicating legal considerations surrounding the validity of
biotechnology patents are in transition, and there can be no assurance that the
historical legal standards surrounding questions of patent validity will
continue to be applied or that current defenses as to issued patents will, in
fact, be considered substantial in the future. In addition, there can be no
assurance as to the degree and range of the protection any patents will afford,
whether patents will be issued, or the extent to which the Company will be
successful in not infringing on any patents granted to others. The Company has
entered into nonexclusive license agreements, and anticipates entering into
additional license agreements in the future, with third parties for technologies
which may be useful or necessary for the manufacture of the Company's products.
The Company believes that such additional licenses will be available on
commercially reasonable terms. The Company has initiated discussions with
commercial entities which hold patents that may be needed for some of the
Company's activities. There can be no assurance that any licenses required
under any patents or proprietary rights will be made available on terms
acceptable to the Company, if at all. If the Company does not obtain required
licenses, it could encounter delays in product development while it attempts to
design around the patents, or it could find that the development, manufacture or
sale of products requiring such licenses could be foreclosed. In addition, the
Company could incur substantial costs in defending any patent litigation brought
against it or in asserting its patent rights, including those licensed to it by
third parties, in a suit against another party. Additionally, there can be no
assurance that the Company's confidentiality agreements will adequately protect
its trade secrets, know-how or other proprietary information.
Technological Change and Competition. The Company is involved in an intensely
competitive field. There are many companies and institutions, both public and
private, including pharmaceutical companies, chemical companies, specialized
biotechnology companies and research and academic institutions, that are engaged
in developing synthetic pharmaceuticals and biotechnological products for human
therapeutic applications, including the applications targeted by the Company. A
number of competitors are conducting research and development in the areas of
cell-trafficking, mediators of inflammation and intracellular signal
transduction, and research by others specifically addresses areas of technology
and/or medical indications or conditions targeted by the Company. Many of these
companies have substantially more capital, research and development, regulatory,
manufacturing, marketing, human and other resources and experience than the
Company and may succeed in developing products that are more effective or less
costly than any that may be developed by the Company and may also be more
successful than the Company in production or marketing. In addition, other
recently developed technologies are, or may in the future be, the basis for
competitive products. There can be no assurance that competitors will not
succeed in developing technologies and products that are more effective than any
being developed by the Company or that would render the Company's technology and
products obsolete or noncompetitive.
Volatility of Stock Price. Market prices for securities of biotechnology and
pharmaceutical companies have been highly volatile. The Company believes that
several factors could have a significant effect on the future price of the
Company's Common Stock, including, without limitation, future announcements by
the Company or others regarding progress in product development, results and
progress of preclinical studies and clinical trials, progress of existing and
future collaborations, evidence of the safety or efficacy of products,
anticipated and actual financing events, scientific discoveries, technological
innovations, commercial products, patents or propriety rights or regulatory
actions, litigation, fluctuations in the Company's results of operations and
changes in general market conditions for biotechnology and pharmaceutical
stocks.
15
<PAGE>
Governmental Regulation. The FDA and comparable agencies in foreign countries
impose substantial requirements on biotechnology and pharmaceutical companies
during development of potential products. These requirements include lengthy
and detailed laboratory and clinical testing procedures, sampling activities and
other costly and time-consuming procedures surrounding the development and
testing of proposed products. Governmental regulation also affects the
manufacture and marketing of pharmaceutical products. Any future FDA or other
governmental approval of products developed by the Company may entail
limitations on the indicated uses for which such products may be marketed. The
effect of governmental regulation may be to delay marketing new products for a
considerable period of time, to impose costly requirements on the Company's
activities or to provide a competitive advantage to other companies that compete
with the Company. There can be no assurance that FDA or other regulatory review
or approval for any product or proposed product will be granted on a timely
basis, if at all. A delay in obtaining or failure to obtain such approvals
could adversely affect the Company's liquidity and capital resources.
Potential Product Liability. The Company faces an inherent business risk of
exposure to product liability claims in the event that the use of its technology
or products is alleged to have resulted in adverse effects. Such risk exists in
human clinical trials. There can be no assurance that the Company can avoid
significant product liability exposure. A product liability claim could
materially adversely affect the business, financial condition or future
prospects of the Company. Although the Company has in place product liability
insurance it believes is appropriate to its current level of clinical trials,
there can be no assurance that the Company will be able to maintain such
coverage in the future on acceptable terms or that such insurance will provide
adequate coverage against potential liabilities. There can be no assurance that
adequate insurance coverage will be available at acceptable costs, if at all.
Hazardous Materials; Environmental Matters. The Company's research and
development activities involve the controlled use of hazardous materials,
chemicals, viruses and radioactive compounds. The Company is subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of such materials and certain waste products.
Although the Company believes that it complies with standards prescribed by such
laws, the risk of accidental contamination or injury from these materials cannot
be completely eliminated. In the event of such an accident, the Company could
be held liable for any damages that result. The Company's operations, business
or assets may be materially adversely affected by current or future
environmental laws or regulations.
Key Personnel. The Company is highly dependent on its scientific and
administrative staff and management team. The loss of any of these individuals
could adversely affect the Company. The Company is also highly dependent on its
ability to attract and retain qualified scientific, technical and key management
personnel. There is intense competition for qualified personnel in the areas of
the Company's activities and there can be no assurance that the Company will be
able to continue to attract and retain qualified personnel necessary for the
development of its business.
16
<PAGE>
Item 2. Properties
ICOS leases and/or owns approximately 220,000 square feet of space in five
buildings located in Bothell, Washington, a suburb of Seattle. The Company's
leases expire from 2000 to February 2004, with options to renew for additional
five-year periods. The Company's principal administrative offices, research
laboratories, and clinical production facility occupy approximately 190,000
square feet. In December 1992, the Company purchased approximately seven acres
of undeveloped land adjacent to its leased facilities. This purchase gives the
Company the flexibility to expand in its current geographic location. Over the
next several years, the Company plans to lease or acquire additional facilities
to accommodate the activities and personnel as necessary to further develop its
products.
Item 3. Legal Proceedings
The Company is not a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of ICOS' stockholders during the fourth
quarter of its fiscal year ended December 31, 1998.
17
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
ICOS Common Stock trades on the Nasdaq Stock Market under the symbol ICOS. As
of December 31, 1998, there were 2,854 holders of record of Common Stock. The
Company has never paid any cash dividends and does not anticipate paying any
cash dividends in the foreseeable future. The Company intends to retain future
earnings and capital for use in its business. The following table sets forth,
for the periods indicated, the high and low sale prices for the Common Stock as
reported by the Nasdaq Stock Market.
<TABLE>
<CAPTION>
1997 High Low
---- -------- --------
<S> <C> <C>
First Quarter $ 9 1/4 $ 7 1/4
Second Quarter 8 9/16 6 7/16
Third Quarter 14 3/8 7 7/8
Fourth Quarter 19 1/4 11
1998
----
First Quarter 19 12 1/8
Second Quarter 24 1/2 13
Third Quarter 24 2/3 14 5/8
Fourth Quarter 29 7/8 14 3/4
1999
----
First Quarter
(through March 1, 1999) 24 3/4 24 1/4
</TABLE>
18
<PAGE>
Item 6. Selected Financial Data
The information set forth below should be read in conjunction with Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, and the Consolidated Financial Statements and Notes thereto included
in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands, except per share data)
--------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Collaborative research and
development from related
parties $ 33,758 $21,076 $ - $ - $ -
License of technology to related party 75,000 8,500 - - -
Other 2,010 2,000 2,000 1,500 -
-------- --------- --------- --------- ---------
Total revenues 110,768 31,576 2,000 1,500 -
-------- --------- --------- --------- ---------
Operating expenses:
Research and development 76,978 42,783 30,011 24,039 21,272
General and administrative 4,031 2,737 2,555 2,482 2,835
-------- --------- --------- --------- ---------
Total operating expenses 81,009 45,520 32,566 26,521 24,107
-------- --------- --------- --------- ---------
Operating income (loss) 29,759 (13,944) (30,566) (25,021) (24,107)
-------- --------- --------- --------- ---------
Other income (expense):
Investment income 2,369 2,164 2,070 1,768 1,498
Other, net (170) (235) 1 (116) (139)
-------- --------- --------- --------- ---------
2,199 1,929 2,071 1,652 1,359
Net income (loss) before
income taxes 31,958 (12,015) (28,495) (23,369) (22,748)
Income taxes - current 648 - - - -
-------- --------- --------- --------- ---------
Net income (loss) $31,310 $(12,015) $(28,495) $(23,369) $(22,748)
======== ========= ========= ========= =========
Net income (loss) per
common share - basic $ .78 $ (.30) $ (.77) $ (.73) $ (.88)
======== ========= ========= ========= =========
Net income (loss) per
common share - diluted $ .67 $ (.30) $ (.77) $ (.73) $ (.88)
======== ========= ========= ========= =========
Weighted average common shares
outstanding - basic 40,139 39,595 36,805 32,194 25,946
Weighted average common shares
outstanding - diluted 46,849 39,595 36,805 32,194 25,946
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- -----------
Balance Sheet Data:
Cash and cash equivalents,
investment securities and
interest receivable $78,065 $25,773 $41,820 $21,376 $44,485
Other current assets 8,292 2,956 693 732 711
Restricted investment securities - - - - 1,800
Net property and equipment 19,576 17,950 15,627 15,386 11,310
Other non-current assets 7,414 7,386 65 241 229
-------- --------- --------- --------- ---------
Total assets $113,347 $54,065 $58,205 $37,735 $58,535
======== ========= ========= ========= =========
Current liabilities $ 14,614 $ 4,193 $ 2,938 $ 4,443 $ 3,441
Obligations under capital lease
excluding current installments - - - - 74
Stockholders' equity 98,733 49,872 55,267 33,292 55,020
-------- --------- --------- --------- ---------
Total liabilities and
stockholders' equity $113,347 $54,065 $58,205 $37,735 $58,535
======== ========= ========= ========= =========
</TABLE>
19
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Risks and Uncertainties
- -----------------------
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and notes included elsewhere in this
report. This discussion contains forward-looking statements that are subject to
certain risks and uncertainties including, without limitation, statements of the
Company's plans, objectives, expectations and intentions. The words "believes,"
"intends," "anticipates," "plans to," "expects," and similar expressions are
intended to identify forward-looking statements. The Company's actual results
could differ materially from those anticipated or implied by the forward-looking
statements discussed here. Factors that could cause or contribute to such
differences include those discussed under "Overview" in Item 1 "Business" above.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. The Company
undertakes no obligation to publicly release the results of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
Overview
- --------
The Company is discovering and developing proprietary pharmaceuticals for the
treatment of inflammatory diseases and other serious medical conditions.
The Company's fundamental strategy is to identify and develop a significant
number of potential product candidates into breakthrough products with high
commercial potential. By understanding the underlying biochemical and
physiological mechanisms and identifying the cellular and molecular entities
involved in the disease process, the Company is developing product candidates
that address important opportunities in the treatment of acute and chronic
diseases that have inflammatory components as well as certain cardiovascular
diseases and cancer. Through this strategy, the Company believes it will be able
to develop novel therapeutics that are more selective than those presently
available.
LeukArrest(TM)
During 1998, the Company completed a Phase 2 clinical study of LeukArrest(TM) to
evaluate safety and efficacy following an ischemic stroke. In January 1999, the
Company also commenced a Phase 3 clinical study to evaluate the efficacy of
LeukArrest(TM) in ischemic stroke. During 1998, the Company began a Phase 2
clinical study of LeukArrest(TM) as a potential prevention of organ damage
following trauma-induced hemorrhagic shock. The Company also started a Phase 2
clinical study of LeukArrest(TM) during 1998 to evaluate its use in preventing
tissue damage following myocardial infarction or heart attack. In addition, the
Company completed a Phase 2 single-dose clinical study of LeukArrest(TM) for
treatment of multiple sclerosis. The study, designed to evaluate the recovery of
neurological function following an exacerbation of a patient's disease,
demonstrated no clinical benefit. A Phase 2 multi-dose clinical study of
LeukArrest(TM) to evaluate neurological function was concluded late in 1998.
Data from this trial is expected to be available in early 1999.
Pafase(TM)
In 1998, the Company completed a Phase 2 clinical study of Pafase(TM) in
patients at risk to develop acute respiratory distress syndrome ("ARDS"). The
study demonstrated that Pafase(TM) is well tolerated and non-antigenic. Based on
the results of this study, the Company initiated a Phase 2 clinical study to
further evaluate the safety and efficacy of Pafase(TM) in patients at risk to
develop ARDS. Also in 1998, the Company completed a Phase 2 clinical study to
test the safety and efficacy of Pafase(TM) in an inhaled allergen model of
asthma. The results of this study indicate that Pafase(TM) did not improve early
or late asthmatic responses. The Company also began a Phase 2 clinical study of
Pafase(TM) in patients who have had a diagnostic procedure known as ERCP
(endoscopic retrograde cholangiopancreatography). Patients who undergo this
procedure are at an increased risk to develop pancreatitis.
IC351
During 1998, the Company completed several Phase 2 clinical studies to evaluate
the safety and efficacy of IC351 in patients with mild to moderate male erectile
dysfunction. In October 1998, the Company and Eli Lilly and Company ("Lilly")
formed Lilly ICOS LLC ("Lilly ICOS"), a 50/50 owned limited liability company,
to jointly develop and globally commercialize
20
<PAGE>
IC351. Under the terms of the joint venture agreement, the Company received a
$75 million payment in October and could receive future success milestone
payments based on the progression of IC351 through development. The joint
venture was capitalized by Lilly through a cash infusion and the contribution by
the Company of intellectual property associated with IC351 and its research
platform. The joint venture will market products resulting from this
collaborative effort in North America and Europe. For countries outside North
America and Europe, products will be licensed exclusively to Lilly for
commercialization with a royalty to be paid to the joint venture.
ICM3
In 1998, the Company completed a Phase 1 clinical study of ICM3 in patients with
moderate to severe psoriasis. The Company initiated two Phase 1/2 clinical
studies to further evaluate the safety and efficacy of ICM3 in patients with
moderate to severe psoriasis.
IC14
In January 1999, the Company announced the start of a Phase 1 clinical study in
Europe to establish the safety and pharmacokinetic profile of IC14. Based on the
results of this study, the Company may initiate a clinical study to evaluate
IC14 in the treatment of severe sepsis.
The Company had an accumulated deficit of $91.1 million as of December 31, 1998.
The Company's results of operations may vary significantly from quarter to
quarter and will depend, among other factors, on the timing of certain expenses,
payments received on certain research collaborations, and the progress of the
Company's research and development efforts. The Company expects increased
expenditures in 1999 and subsequent years as it expands the clinical trials
being conducted on the product candidates LeukArrest(TM), IC351, ICM3,
Pafase(TM), IC14 and other potential product candidates. Some of these costs are
to be reimbursed by Suncos Corporation ("Suncos"), the Company's joint venture
with Suntory Limited of Japan, ICOS Clinical Partners L.P. (the "Partnership")
or Lilly ICOS. The Company anticipates expanding preclinical research and other
development activities for additional potential products and commencing clinical
trials on those it considers most promising.
Results of Operations
- ---------------------
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Revenue for the year ended December 31, 1998 totaled $110.8 million and
consisted of $78.8 million from Lilly ICOS, $15.1 from the Partnership, $14.9
million in cost reimbursement revenue from Suncos, and $2.0 million received
under the Company's research and development agreement with Abbott Laboratories.
The revenue from Lilly ICOS included both a one-time license fee of $75 million
as well as cost reimbursement for development costs incurred by the Company on
behalf of Lilly ICOS. Revenue for the year ended December 31, 1997 totaled $31.6
million and consisted of $18.4 million from the Partnership, $11.2 million in
cost reimbursement revenue from Suncos, and $2.0 million received under the
Company's agreement with Abbott Laboratories. The revenue from the Partnership
in 1997 included both a one-time license fee as well as cost reimbursement for
development costs incurred by the Company on behalf of the Partnership.
Total operating expenses for 1998 increased 78% to $81.0 million from $45.5
million in 1997. Research and development expense increased 80% to $77.0 million
in 1998 from $42.8 million in 1997, due primarily to costs related to the
progression of clinical trials for LeukArrest(TM), Pafase(TM), ICM3 and IC351,
the commencement of clinical trials for IC14, and the expansion of other product
development efforts. General and administrative expenses increased 47% to $4.0
million in 1998 from $2.7 million in 1997 due primarily to the increase of
administrative activities and personnel to support the increase in research and
development activity and costs related to the establishment of the joint venture
with Lilly.
Investment income for 1998 was $2.4 million compared with $2.2 million in 1997.
A provision for Federal income taxes of $0.6 million was recorded in 1998 for
alternative minimum tax on the Company's earnings.
21
<PAGE>
The Company reported net income of $31.3 million for the year ended December 31,
1998 compared to a net loss of $12.0 million for the year ended December 31,
1997 due primarily to the payments received under the Company's joint venture
with Lilly.
Year Ended December 31, 1997 Compared With Year Ended December 31, 1996
Revenue for the year ended December 31, 1997 totaled $31.6 million and consisted
of $18.4 million from the Partnership, $11.2 million in cost reimbursement
revenue from Suncos, and $2.0 million received under the Company's research and
development agreement with Abbott Laboratories. The revenue from the Partnership
included both a one-time license fee as well as cost reimbursement for
development costs incurred by the Company on behalf of the Partnership. Revenue
for the year ended December 31, 1996 was $2.0 million, and consisted entirely of
payments received under the Company's agreement with Abbott Laboratories.
Total operating expenses for 1997 increased 40% to $45.5 million from $32.6
million in 1996. Research and development expense increased 43% to $42.8 million
in 1997 from $30.0 million in 1996, due primarily to costs related to the
progression of clinical trials for LeukArrest(TM), Pafase(TM), ICM3, IC14 and
IC351, and the expansion of other product development efforts. Primarily due to
increased administrative activities and personnel to support increased research
and development activity, general and administrative expenses increased to $2.7
million in 1997 from $2.6 million in 1996.
Investment income for 1997 was $2.2 million compared with $2.1 million in 1996.
The Company's net loss decreased 58% to $12.0 million in 1997 compared with a
net loss of $28.5 million in 1996. The decrease in net loss was primarily due to
revenue recognized from Suncos and the Partnership, including a one-time license
fee and cost reimbursement.
Liquidity and Capital Resources
- -------------------------------
The Company's future cash requirements and expense levels will depend on many
factors, including continued scientific progress in its research and development
programs; the results of research and development, preclinical studies and
clinical trials; acquisitions of products or technology, if any; relationships
with corporate collaborators; competing technological and market developments;
the time and costs involved in filing and prosecuting patents and enforcing
patent claims; the regulatory process, the time and costs of manufacturing
scale-up and commercialization activities; and other factors. The Company has
financed its operations since inception through private and public sales of the
Company's Common Stock, investment income, revenue from research and development
collaborations, corporate joint ventures, limited partnerships, license
payments, grants and capital lease obligations.
At December 31, 1998, the Company had $78.1 million in cash and cash
equivalents, investment securities and interest receivable, an increase of $52.3
million from December 31, 1997. This increase is primarily related to payments
received from the Company's joint venture with Lilly and proceeds from the
exercise of stock options and warrants. The increase was partially offset by
increased expenses associated with clinical trials for LeukArrest(TM),
Pafase(TM), IC351 and ICM3, production of materials to support these and future
clinical trials, regulatory submissions and expansion of the Company's other
research and development programs. In addition, the Company invested $5.3
million in research and development equipment, computer equipment and leasehold
improvements.
On August 15, 1997, the Partnership completed the sale to private investors of
interests in the Partnership. The sale will result in net proceeds to the
Partnership of approximately $79.8 million. Approximately $25.9 million, before
payment of offering costs, was paid to the Partnership at closing of the sale of
the Partnership units. The Partnership received $21.9 million in 1998 with the
balance to be received in installments in May 1999 and May 2000. In connection
with the offering of the Partnership units, the Company issued warrants to
purchase an aggregate of approximately 7.6 million shares of the Company's
Common Stock. Net proceeds from the offering will be used by the Partnership to
fund continued development by the Company of the Partnership Products pursuant
to the terms of the Product Development Agreement. While the Partnership will
reimburse the Company for certain costs associated with the development of these
compounds, it is unlikely that all such costs will be reimbursed. Certain rights
relating to the Partnership Products were licensed by the Partnership from the
Company in connection with the sale of the Partnership units.
22
<PAGE>
The Company may also incur costs and make capital contributions under its joint
venture agreements with Suntory and Lilly related to the development of
Pafase(TM) and IC351, respectively. Under provisions of the development
agreements with Suncos and Lilly ICOS, the Company is to be reimbursed for
certain of these costs. There can be no assurance that any such costs will be
reimbursed. The Company anticipates that its operating expenses will continue to
increase during 1999 and subsequent years as it adds the personnel and
facilities associated with advancing several potential product candidates
through development and clinical trials. Foreseeable incremental costs may
include, but are not limited to, those associated with the Company's own product
development, preclinical studies and clinical trials, patent filings and
administrative activities.
The Company intends to use its financial resources for ongoing and future
clinical trials and other development and marketing costs of certain of its
current product candidates, including LeukArrest(TM), Pafase(TM), ICM3, IC14 and
IC351, expansion of preclinical research and development activities for
additional potential product candidates and the initiation of clinical trials
for those product candidates deemed most promising.
The Company anticipates that its existing cash, including interest income from
cash investments and anticipated payments from Abbott Laboratories, Suncos,
Lilly ICOS and the Partnership, will be adequate to satisfy its cash
requirements until mid 2000. However, the amounts and timing of expenditures
will depend on the progress of ongoing research and development, the rate at
which operating losses are incurred, the execution of development and licensing
agreements with potential corporate partners, the Company's development of
products, the Food and Drug Administration ("FDA") regulatory process, and other
factors, many of which are beyond the Company's control.
The Company has been successful in negotiating collaborations and joint
development agreements with other parties where the work and strategies of the
other parties complement those of the Company. In some instances, these
relationships may involve commitments by the Company to fund some or all of
certain development programs. Although corporate collaborations, partnerships
and joint ventures have provided cost reimbursement revenue to the Company in
the past, there can be no assurance that such funds will be available to the
Company in the future. The Company intends to expand its operations and hire the
additional personnel necessary to continue development of its current portfolio
of product candidates in clinical trials, as well as continuing discovery and
preclinical research to identify additional potential drug candidates. The
Company anticipates that expansion of these activities will increase operating
expenses in future quarters. Further, incremental expenditures will be required
for additional laboratory, production and office facilities to accommodate
activities and the personnel associated with this increased development
activity. As such, the Company will need to raise substantial additional funds
to conduct its research and development activities, preclinical studies,
clinical trials and pre-marketing activities necessary to bring its product
candidates to market and to establish marketing capabilities if and when a
product candidate is ready for commercialization. There can be no assurance that
additional funds will be available as needed or on terms that are acceptable to
the Company. Insufficient funding will require the Company to delay, scale-back
or eliminate some or all of its research and development activities, planned
clinical trials and administrative programs.
Year 2000
- ---------
Overview
The Year 2000 problem is the result of computer programs being written using
two, rather than four, digits to define the applicable year. Unless corrected,
those systems with time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000, potentially resulting in system
failures or miscalculations.
Readiness
Based on an initial review of its computer systems and a survey of its key
outside vendors, the Company presently believes that Year 2000 issues will not
pose significant operational problems. The Company believes that it can correct
the majority of its internal Year 2000 issues with certain modifications to
existing software and selective conversion to new software and hardware. In
addition, most of the Company's software and computer equipment have been
purchased within the last five years and as such, have been manufactured with
Year 2000 considerations in mind. Finally, all of the Company's critical
software applications have been purchased from third-party vendors, the majority
of which have already provided upgrades
23
<PAGE>
to bring their products into Year 2000 compliance. The Company estimates that it
has already addressed the majority of expected internal Year 2000 issues through
normal upgrades and new purchases of software and computer equipment. While the
Company does not believe its Year 2000 issues will be significant to its
operations, it has established a plan to proactively identify and address
remaining Year 2000 issues. Currently, the Company is in the process of
analyzing its software and computer systems and the Year 2000 status of its key
outside vendors. The Company is contacting software and hardware vendors and its
key outside vendors to confirm Year 2000 compliance for each item or vendor
identified in the analysis. Based on the information gathered from each vendor,
the Company will implement a Year 2000 solution if warranted. Finally, the
Company will perform tests of relevant systems and correct any Year 2000 issues
that are identified.
Costs
An initial review of the Company's computer systems showed that a majority of
the Company's software, hardware, and embedded controllers have been
manufactured with Year 2000 issues in mind. As such, the Company believes that
the cost of identifying and correcting any internal Year 2000 issues will be
minimal.
Risks
It is possible that after analyzing its systems for Year 2000 issues, making
necessary upgrades and replacements to its systems and testing its systems, the
Company may still encounter Year 2000 problems. Furthermore, it is possible that
some of the Company's key outside vendors will experience Year 2000 problems.
Year 2000 problems with the Company's computer systems or its key outside
vendors, might cause delays in development activities or in clinical trials and
ultimately delay the launch of products or have other effects on the Company's
operations. The Company anticipates that its highest Year 2000 risks are in the
Clinical and Manufacturing areas, as failures in these areas may delay
development or increase the time to bring a product to market.
Contingency Plans
The Company is in the process of establishing contingency plans to address any
Year 2000 issues.
Quantitative and Qualitative Disclosure about Market Risk
The Company does not use derivative financial instruments in its investment
portfolio and its financial instruments consist of cash and cash equivalents,
short-term investments, accounts payable and a note receivable from a related
party. Cash equivalents and short-term investments principally consist of money
market accounts and corporate commercial paper. The Company's exposure to market
risk for changes in interest rates relates primarily to its short-term
investments, thus, fluctuations in interest rates would not have a material
impact on the fair value of these securities.
24
<PAGE>
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Consolidated Financial Statements Page in Form 10-K
- ------------------------------------------------------------------------------ -----------------
<S> <C>
Independent Auditors' Report............................................. 26
Consolidated Balance Sheets at December 31, 1998 and 1997................ 27
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997, and 1996........................................ 28
Consolidated Statements of Comprehensive Operations for the years ended
December 31, 1998, 1997, and 1996........................................ 29
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997, and 1996........................................ 30
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997, and 1996........................................ 31
Notes to Consolidated Financial Statements............................... 32-42
</TABLE>
All consolidated financial statement schedules have been omitted since the
information is not required or because the information required is included in
the consolidated financial statements or the notes thereto.
25
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ICOS Corporation:
We have audited the accompanying consolidated balance sheets of ICOS Corporation
and subsidiary as of December 31, 1998, and 1997 and the related consolidated
statements of operations, comprehensive operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ICOS Corporation and
subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1998 in conformity with generally accepted accounting principles.
/S/ KPMG LLP
Seattle, Washington
January 15, 1999
26
<PAGE>
ICOS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(in thousands)
December 31,
------------------------------------------------
1998 1997
-------------------- -----------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 69,584 $ 1,404
Investment securities available for sale, at market value 8,090 23,845
Interest receivable 391 524
Receivables from related parties under collaborative arrangements 7,524 2,270
Other receivables 267 177
Prepaid expenses 501 509
-------------------- -----------------------
Total current assets 86,357 28,729
-------------------- -----------------------
Property and equipment, at cost:
Land 2,310 2,310
Building and improvements 9,461 9,454
Leasehold improvements 9,805 8,361
Furniture and equipment 18,865 15,450
-------------------- -----------------------
40,441 35,575
Less accumulated depreciation and amortization 21,135 17,676
-------------------- -----------------------
19,306 17,899
Construction in progress 270 51
-------------------- -----------------------
Net property and equipment 19,576 17,950
-------------------- -----------------------
Loan receivable from related party 7,341 7,341
-------------------- -----------------------
Other assets 73 45
-------------------- -----------------------
$113,347 $ 54,065
==================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,080 $ 2,363
Accrued payroll and benefits 1,005 873
Federal income taxes payable 648 -
Other accrued expenses 6,881 957
-------------------- -----------------------
Total current liabilities 14,614 4,193
Stockholders' equity:
Commitments and contingencies - -
Preferred Stock, $.01 par value. Authorized 2,000,000 shares;
none issued - -
Common Stock, $.01 par value. Authorized 100,000,000 shares;
issued and outstanding 41,482,043 at December 31, 1998 and
39,885,414 at December 31, 1997 415 399
Additional paid-in capital 189,436 171,879
Accumulated other comprehensive income (loss) (3) 19
Accumulated deficit (91,115) (122,425)
---------------------- -----------------------
Total stockholders' equity 98,733 49,872
---------------------- -----------------------
$113,347 $ 54,065
====================== =======================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Collaborative research and development from
related parties $ 33,758 $ 21,076 $ -
License of technology to related party 75,000 8,500 -
Other 2,010 2,000 2,000
---------- ----------- -----------
Total revenues 110,768 31,576 2,000
---------- ----------- -----------
Operating expenses:
Research and development 76,978 42,783 30,011
General and administrative 4,031 2,737 2,555
---------- ----------- -----------
Total operating expenses 81,009 45,520 32,566
---------- ----------- -----------
Operating income (loss) 29,759 (13,944) (30,566)
---------- ----------- -----------
Other income (expense):
Investment income 2,369 2,164 2,070
Other, net (170) (235) 1
---------- ----------- -----------
2,199 1,929 2,071
---------- ----------- -----------
Net income (loss) before income taxes $ 31,958 $(12,015) $(28,495)
========== =========== ===========
Income taxes - current 648 - -
---------- ----------- -----------
Net income (loss) $ 31,310 $(12,015) $(28,495)
========== =========== ===========
Net income (loss) per common share - basic $0.78 $(0.30) $(0.77)
========== =========== ===========
Net income (loss) per common share - diluted $ 0.67 $(0.30) $(0.77)
========== =========== ===========
Weighted average common shares outstanding - basic 40,139 39,595 36,805
========== =========== ===========
Weighted average common shares outstanding - diluted 46,849 39,595 36,805
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net income (loss) $31,310 $(12,015) $(28,495)
Other comprehensive income (loss)
Unrealized gains (losses) on investment securities:
Unrealized holding gains arising during the year 6 13 60
Less reclassification adjustments for (gains)
losses included in net income (loss) (28) (4) 20
---------- ---------- ----------
Total other comprehensive income (loss) (22) 9 80
---------- ---------- ----------
Comprehensive income (loss) $31,288 $(12,006) $(28,415)
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the year ended December 31, 1998
<TABLE>
<CAPTION>
(in thousands)
------------------------------------------------------------------------------------------------
Additional Accumulated other Total
Common paid-in Restricted comprehensive Accumulated stockholders'
Stock capital stock income (loss) deficit equity
-------- ---------- ---------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $322 $115,163 $(208) $(70) $ (81,915) $ 33,292
Issuance of 6,900,000 shares of
Common Stock, net of issuance
costs of $3,506,485 69 49,037 - - - 49,106
Vesting of 11,250 shares of
restricted Common Stock - - 208 - - 208
Issuance of 284,145 shares of
Common Stock from exercise of
options 3 1,073 - - - 1,076
Other comprehensive income - - - 80 - 80
Net loss for the year ended
December 31, 1996 - - - - (28,495) (28,495)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1996 394 165,273 - 10 (110,410) 55,267
Issuance of 467,661 shares of
Common Stock from exercise of
options 5 2,525 - - - 2,530
Value of warrants issued to
ICOS Clinical Partners, L.P. - 4,081 - - - 4,081
Other comprehensive income - - - 9 - 9
Net loss for the year ended
December 31, 1997 - - - - (12,015) (12,015)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1997 399 171,879 - 19 (122,425) 49,872
Issuance of 292,429 shares of
Common Stock from exercise
of options 3 1,950 - - - 1,953
Issuance of 1,304,200 shares of
Common Stock from exercise
of warrants 13 12,260 - - - 12,273
Value of warrants issued to
ICOS Clinical Partners, L.P. - 3,347 - - - 3,347
Other comprehensive loss - - - (22) - (22)
Net income for the year ended
December 31, 1998 - - - - 31,310 31,310
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at December 31, 1998 $415 $189,436 $ - $ (3) $ (91,115) $ 98,733
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
ICOS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1998 1997 1996
-------------- ------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (income) loss $ 31,310 $ (12,015) $ (28,495)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,459 3,678 3,519
Amortization of investment premiums/discounts (320) (570) (381)
(Gain) loss on sale of investment securities (28) (4) 20
Amortization of restricted stock - - 208
Change in operating assets and liabilities:
Interest receivable 133 (375) (43)
Receivables from related parties under collaborative arrangements (5,435) (2,089) -
Other receivables (90) (84) 5
Prepaid expenses 8 91 34
Accounts payable 3,888 1,008 355
Accrued payroll, benefits and other accrued expenses 6,704 76 (545)
Deferred research and development revenue - - (500)
-------------- ------------ -------------
Net cash provided by (used in) operating activities 39,629 (10,284) (25,823)
-------------- ------------ -------------
Cash flows from investing activities:
Purchases of investment securities (17,421) (41,644) (50,884)
Maturities of investment securities 7,000 31,978 14,000
Sales of investment securities 26,502 25,916 14,828
Acquisitions of property and equipment (5,256) (5,830) (4,531)
Loan receivable from related party - (7,341) -
(Increase) decrease in other assets (28) 20 176
-------------- ------------ -------------
Net cash provided by (used in) investing activities 10,797 3,099 (26,411)
-------------- ------------ -------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock - - 49,106
Proceeds from exercise of stock options and warrants 14,226 2,530 1,076
Proceeds from issuance of warrants 3,528 3,900 -
Principal payments on obligations under capital lease - - (45)
-------------- ------------ -------------
Net cash provided by financing activities 17,754 6,430 50,137
-------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents 68,180 (755) (2,097)
Cash and cash equivalents at beginning of year 1,404 2,159 4,256
-------------- ------------ -------------
Cash and cash equivalents at end of year $ 69,584 $ 1,404 $ 2,159
============== ============ =============
Supplemental disclosure of noncash financing and investing activities:
Acquisition of property and equipment financed through accounts
payable $ - 171 $ -
Receivable for issuance of warrants $ - 181 $ -
============== ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
ICOS CORPORATION
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(1) Summary of Significant Accounting Policies
(a) Nature of Operations
ICOS Corporation and subsidiary (the "Company") is discovering and
developing new pharmaceutical candidates by seeking points of
intervention in the inflammatory process that may lead to more
specific and efficacious drugs. The Company's research and drug
development programs involve both acute and chronic conditions.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, ICOS Development Corporation.
All significant intercompany transactions and balances have been
eliminated in consolidation.
(c) Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(d) Financial Instruments
The Company's financial instruments consist of cash and cash
equivalents, short-term investments, accounts payable and a note
receivable from a related party. The Company's cash and cash
equivalents and short-term investments are diversified among security
types and issuers, and approximate fair value. The Company's other
financial instruments are short-term and/or have little or no risk and
therefore are considered to have fair value equal to book value.
(e) Cash and Cash Equivalents
All highly liquid short-term investments purchased with a maturity of
three months or less are considered to be cash equivalents.
Investments in cash and cash equivalents consist primarily of
investments in money market accounts and corporate commercial paper.
(f) Investment Securities
The Company's investment securities are classified as available-for-
sale and carried at market value, based on quoted market prices, with
unrealized gains and losses excluded from results of operations and
reported in the statements of comprehensive operations. Gross realized
gains and losses on sales of investment securities are determined on
the specific identification method and included in investment income.
(g) Property and Equipment
Depreciation of furniture and equipment is provided on the straight-
line method over the assets' estimated useful lives of three to five
years. The Company owns one building which is being depreciated over
its estimated remaining economic life of ten years. Leasehold and
building improvements are depreciated over the remaining lease term
and remaining economic life of the building, respectively.
32
<PAGE>
(h) Investment in Affiliates
Investments in ICOS Clinical Partners, L.P. ("the Partnership"),
Suncos Corporation ("Suncos") and Lilly ICOS LLC ("Lilly ICOS") are
accounted for using the equity method. Accordingly, the investment is
recorded at cost, adjusted for the Company's share of income or losses
of the entities.
(i) Revenue Recognition
For contracts under which the Company is reimbursed for research and
development efforts, revenue is recognized as the related expenses are
incurred. Payments received that are related to future performance are
deferred and recognized as revenue over the specified future
performance periods.
(j) Research and Development Costs
Research and development costs are charged to expense as incurred.
(k) Income Taxes
Income taxes are accounted for using the asset and liability method
whereby deferred tax assets and liabilities are recognized for the
future tax consequences attributed to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. A valuation allowance is
established when necessary to reduce deferred tax assets to the
amounts expected to be realized.
(l) Net Income (Loss) Per Common Share
Basic earnings per share ("EPS") is based on the weighted average
number of common shares outstanding during the period. Diluted EPS is
based on the potential dilution that would occur on exercise or
conversion of securities into common stock using the treasury stock
method. Common shares that are considered to be antidilutive are
excluded from the computation of diluted EPS. Securities included in
the Company's calculation of diluted EPS include all outstanding stock
options, stock warrants and contingently issuable stock warrants.
(m) Stock Based Compensation
The Company applies the provisions of Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its
employee stock option grants. Accordingly, the Company does not
recognize compensation expense for options granted to employees with
an exercise price equal to or in excess of the fair value of common
shares at the date of grant. The Company provides pro forma net income
(loss) and pro forma net income (loss) per share disclosures as if
compensation cost had been determined based on the method defined in
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock Based Compensation in note 7.
(n) Comprehensive Operations
In 1998, the Company adopted SFAS 130, Reporting Comprehensive Income.
The objective of SFAS 130 is to report a measure of all changes in
equity of an enterprise that do not result from transactions with
owners ("comprehensive income"). Comprehensive income is the total of
net income (loss) and all other nonowner changes in equity.
(o) Business Segments
In 1998 the Company adopted SFAS 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS 131 requires an enterprise to
report segment information based on how management internally
evaluates the operating performance of its business units (segments).
The Company's operations
33
<PAGE>
are confined to one business segment, the discovery and development of
proprietary pharmaceuticals for the treatment of inflammatory diseases
and other serious medical conditions.
(2) Financing
The Company anticipates that its existing capital resources, together with
its existing collaborative arrangements, should be sufficient to fund its
cash requirements to mid 2000. However, the amounts and timing of
expenditures will depend on the progress of ongoing research and
development, the rate at which operating losses are incurred, the execution
of development and licensing agreements with potential corporate partners,
the Company's development of products, the Food and Drug Administration
("FDA") regulatory process, and other factors, many of which are beyond the
Company's control. The Company's existing capital resources and
collaborative arrangements will not be sufficient to fund the Company's
operations through commercialization of its first product. Accordingly, the
Company will need to raise substantial additional funds for its programs.
(3) Investment Securities
The following table summarizes the Company's investment securities at
December 31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
Gross Gross
unrealized unrealized
Market value gains losses Amortized cost
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
December 31, 1998:
Corporate debt securities $ 8,090 $ - $ 3 $ 8,093
======= ============ ============ =======
December 31, 1997:
U.S. Treasury Notes $ 5,517 $ 13 $ - $ 5,504
Corporate debt securities 17,792 6 3 17,789
U.S. government agency
mortgage-backed securities 536 3 - 533
------- ------------ ------------ -------
Total $23,845 $ 22 $ 3 $23,826
======= ============ ============ =======
</TABLE>
Amortized cost and estimated market value of debt securities at December
31, 1998, by contractual maturity, are shown below (in thousands):
<TABLE>
<CAPTION>
Maturing within: Market value Amortized cost
---------------- ------------ --------------
<S> <C> <C>
1 year $7,574 $7,577
2 years 516 516
</TABLE>
Actual maturities may be different from the contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Investment income includes interest of $2.3 million, $2.2 million and $2.1
million earned on investments for 1998, 1997 and 1996, respectively, and
capital gains of $28,092 and $3,853 for 1998 and 1997, respectively, and a
capital loss of $19,417 for 1996.
(4) Leases
The Company leases office and laboratory space under noncancellable
operating leases that expire from 2000 to 2004. These leases include
options to extend the terms for two additional five-year periods.
Total rent expense was $1.6 million, $1.6 million and $1.3 million for
1998, 1997 and 1996, respectively.
34
<PAGE>
Future minimum lease payments under noncancellable operating leases,
excluding provision for annual increases tied to the consumer price index,
are as follows (in thousands):
<TABLE>
<S> <C>
1999 $1,536
2000 1,579
2001 1,663
2002 1,346
2003 671
Thereafter 56
------
Total minimum lease payments $6,851
======
</TABLE>
Subsequent to December 31, 1998, the Company entered into a noncancellable
operating lease agreement to lease additional office and laboratory space.
The lease expires in 2004 and includes options to extend the terms for
three additional five-year periods. Total rent expense over the initial
term of the lease is expected to be $8.7 million.
(5) Federal Income Taxes
Income tax expense (benefit) on income (loss) before income taxes differs
from "expected" income tax expense (benefit) as computed by applying the
U.S. federal income tax rate of 34% as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- -------
<S> <C> <C> <C>
Estimated federal income tax expense $ 10,866 $(4,085) $(9,688)
(benefit)
Value of warrants issued to ICOS 1,139 1,345 -
Clinical Partners, L.P.
Research and experimentation tax credit (1,271) (710) (615)
carryforwards
Change in valuation allowance excluding (10,182) 3,297 10,580
intraperiod items
Other 96 153 (277)
-------- ------- -------
$ 648 $ - $ -
======== ======= =======
</TABLE>
Temporary differences and carryforwards which give rise to deferred tax
assets are comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
--------- ---------
<S> <C> <C>
Depreciation $ 3,488 $ 3,066
Net operating loss carryforwards 26,888 38,446
Research and experimentation tax credit carryforwards 5,194 3,923
Alternative minimum tax credit carryforward 648 -
Other 1,142 1,107
-------- --------
Gross deferred tax assets 37,360 46,542
Valuation allowance (37,360) (46,542)
-------- --------
Total $ 0 $ 0
======== ========
</TABLE>
35
<PAGE>
The (decrease) and increases in the valuation allowance for deferred tax
assets of $(9.2) million, $4.2 million and $10.7 million, in 1998, 1997 and
1996, respectively, are attributable primarily to the ability or inability
to utilize net operating loss carryforwards. At December 31, 1998, the
Company has net operating tax loss carryforwards available to offset future
taxable income as follows (in thousands):
<TABLE>
<CAPTION>
Year of Expiration
<S> <C>
2009 $ 2,073
2010 21,507
2011 21,039
2012 26,774
2013 7,688
-------
$79,081
=======
</TABLE>
At December 31, 1998, the Company also had available approximately $5.2
million of research and experimentation tax credit carryforwards to offset
future tax liabilities. These credits expire from 2009 to 2013.
Under provisions of the Internal Revenue Code of 1986, as amended,
utilization of the Company's net operating loss carryforwards may be
subject to limitation if it should be determined that a greater than 50%
ownership change were to occur in the future.
(6) Preferred Stock
The Company has the authority to issue up to 2 million shares of Preferred
Stock in one or more series. The Company's Board of Directors has the
authority to fix the powers, designations, preferences, and relative
participating, optional, or other rights thereof, including dividend
rights, conversion rights, voting rights, redemption terms, liquidation
preferences, and the number of shares constituting any series, without any
further vote or action by the Company's stockholders. The issuance of
Preferred Stock in certain circumstances may have the effect of delaying or
preventing a change in control of the Company. Such issuance with voting
and conversion rights may adversely affect the voting power of the Common
Stock holders. The Company has no shares of Preferred Stock outstanding. In
the future, the Company may issue Preferred Stock as part of its overall
financing strategy.
(7) Common Stock Transactions
(a) Public Offering
In May 1996, the Company completed a public offering of 6.9 million
shares of Common Stock at $7.625 per share, with the Company receiving
net proceeds of $49.1 million.
(b) Stock Option Plans
Employee Stock Option Plan
The Company has an incentive and nonqualified stock option plan (the
"Employee Plan") under which 8.5 million shares of Common Stock have
been reserved for grant to various executive, scientific, and
administrative personnel of the Company. All incentive stock options
are granted with an exercise price not less than 100% of the fair
market value of the Common Stock on the grant date. Nonqualified stock
options are generally granted with an exercise price equal to 100% of
the fair market value of the Common Stock on the grant date; however,
in no case are they granted with an exercise price of less than 85% of
the fair market value of the Common Stock on the grant date. The
options generally vest over a four-year period commencing on the grant
date and have a term of ten years from the grant date.
36
<PAGE>
A summary of stock options under the Employee Plan follows (in thousands,
except per share data):
<TABLE>
<CAPTION>
Incentive stock options Nonqualified stock options
outstanding outstanding
--------------------------------- -----------------------------
Weighted- Weighted-
average average
Number of exercise price Number of exercise price
shares per share shares per share
----------- ---------------- --------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 2,760 $ 6.30 659 $ 6.26
Options granted 774 7.72 121 7.46
Cancellations (49) 6.75 - -
Options exercised (119) 4.88 (167) 3.00
----- ------ ---- ------
Balance at December 31, 1996 3,366 6.68 614 6.31
Options granted 1,012 9.40 156 8.61
Cancellations (124) 8.42 (33) 7.50
Options exercised (269) 5.53 (30) 5.76
----- ------ ---- ------
Balance at December 31, 1997 3,985 7.39 707 6.79
Options granted 1,078 17.39 221 17.22
Cancellations (79) 12.68 (2) 12.77
Options exercised (287) 6.54 (5) 8.70
----- ------ ---- ------
Balance at December 31, 1998 4,697 $ 9.65 921 $ 9.25
===== ====== ==== ======
</TABLE>
At December 31, 1998, 1.0 million shares remained reserved and available
for grant under the Employee Plan.
Director Stock Option Plan
The Company has a Stock Option Plan for Nonemployee Directors (the
"Director Plan") under which 1.0 million shares of Common Stock have been
reserved for grant to directors who are not employees of the Company. The
Director Plan provides for an initial grant and automatic annual grants
thereafter to each nonemployee director of a number of nonqualified stock
options determined by dividing $140,000 for 1996 (increased by $10,000 each
year) by the market price of the Common Stock on the grant date. The
exercise price of the options will be the closing market price of the
Common Stock on the grant date. Initial options granted under the Director
Plan become exercisable 50% after the director has served for one year from
the date of initial election to the Board and 100% after two years.
Automatic annual grants are fully vested on the grant date. The options
have a term of ten years but cannot be exercised later than two years after
termination of service as a director.
During 1998, 1997 and 1996, options to purchase 0.1 million, 0.2 million
and 0.1 million shares at weighted-average exercise prices of $14.38, $7.38
and $7.88 per share, respectively, were granted under the Director Plan.
During 1997, options to purchase 0.1 million shares were exercised under
the Director Plan at a weighted-average exercise price of $6.33 per share.
To date, no options have been canceled under this Plan. At December 31,
1998, options to purchase 0.8 million shares were outstanding.
37
<PAGE>
The following table summarizes information about stock options outstanding
under the Employee Plan and Director Plan at December 31, 1998 (in
thousands, except per share data):
<TABLE>
<CAPTION>
Options outstanding Options exercisable
-------------------------------------------------------- ----------------------------------
Weighted-average
remaining Weighted-average Weighted-average
Range of exercise Number contractual life exercise price Number exercise price
prices outstanding (in years) per share exercisable per share
- -------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 3.00 - $ 4.00 649 5.55 $ 3.866 601 $ 3.856
4.19 - 5.63 740 5.35 5.162 736 5.163
5.75 - 7.25 1,043 5.61 6.423 958 6.361
7.31 - 7.63 676 5.48 7.451 631 7.450
7.75 - 8.13 652 7.26 7.921 444 7.909
8.19 - 8.61 757 7.89 8.565 401 8.564
8.63 - 15.44 719 6.70 12.670 458 12.625
15.50 - 17.06 898 8.70 16.955 310 16.943
17.13 - 26.38 316 9.46 19.361 44 19.144
- -----------------------------------------------------------------------------------------------------------------
3.00 - 26.38 6,450 6.73 $ 9.328 4,582 $ 7.796
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its plans
resulting in no compensation cost being recognized related to its stock
options. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have been adjusted to the pro forma
amounts indicated below (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ---------- ----------
<S> <C> <C> <C>
Net income (loss)
As reported $31,310 $(12,015) $(28,495)
Pro forma 24,735 (15,305) (30,481)
Net income (loss) per share - basic
As reported $ 0.78 $ (0.30) $ (0.77)
Pro forma 0.62 (0.39) (0.83)
Net income (loss) per share - diluted
As reported $ 0.67 $ (0.30) $ (0.77)
Pro forma 0.53 (0.39) (0.83)
</TABLE>
Pro forma net income (loss) and net income (loss) per share reflect only
options granted each year since 1995. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net income (loss) and net income (loss) per
share amounts presented above because compensation cost is reflected over
the options' vesting period and compensation cost for options granted prior
to January 1, 1995 is not considered.
The per share weighted-average fair value of stock options granted during
1998, 1997 and 1996, was $10.23, $4.52 and $4.06, respectively, on the
grant date using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 5.4% 6.3% 6.3%
Expected volatility 70.5% 42.0% 40.0%
Expected life in years 4.4 6.0 7.4
</TABLE>
38
<PAGE>
(c) Other Stock Options
Outside of the Employee Plan and the Director Plan, the Company
granted stock options to one investor in June 1990 to purchase 50,000
shares of Common Stock at $3.00 per share. During 1997, all of these
options were exercised.
(d) Warrants Outstanding
In connection with the Partnership's sale of limited partnership
units, the Company issued, on June 5, 1997 and August 15, 1997,
warrants to purchase an aggregate of 5.6 million and 2.0 million
shares, respectively, of the Company's Common Stock at exercise prices
of $9.13 and $10.35 per share, respectively. The warrants are
exercisable from October 1, 1998 through May 31, 2002. During 1998,
warrants to purchase 1.3 million shares were exercised at a weighted-
average exercise price of $9.53 per share. At December 31, 1998,
warrants to purchase 6.2 million shares were outstanding at a
weighted-average exercise price of $9.46 per share. The Company will
issue in June 1999, subject to certain requirements, warrants to
purchase an aggregate of approximately 7.6 million shares of the
Company's Common Stock to the holders of limited partnership interests
in the Partnership. Such additional warrants, if issued, will be
exercisable from July 31, 1999 through June 30, 2004, at an exercise
price to be determined at the time of issuance of such warrants, which
is expected to reflect a 25% premium over the then-prevailing market
prices for the Company's Common Stock.
The warrants issued in connection with the Partnership have been
valued using the Black-Scholes option pricing model. Accordingly,
payments received by the Company from the Partnership are apportioned
between collaborative research and development revenues from related
parties and additional paid-in capital.
Note 8. Net Income (Loss) per Common Share
<TABLE>
<CAPTION>
For the year ended December 31,
(in thousands, except per share data) 1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Basic income (loss) per share computations:
Numerator:
Net income (loss) $31,310 $(12,015) $(28,495)
Denominator:
Weighted-average common shares 40,139 39,595 36,805
------- -------- --------
Basic net income (loss) per share $ 0.78 $ (0.30) $ (0.77)
======= ======== ========
Diluted income (loss) per share computation:
Numerator:
Net income (loss) $31,310 $(12,015) $(28,495)
Denominator:
Weighted-average common shares 40,139 39,595 36,805
Effect of dilutive securities:
Stock options 3,285 - -
Stock warrants 3,425 - -
------- -------- --------
Denominator for dilutive net income (loss) per share 46,849 39,595 36,805
------- -------- --------
Diluted net income (loss) per share $ 0.67 $ (0.30) $ (0.77)
======= ======== ========
</TABLE>
For the year ended December 31, 1998, options to acquire 40,000 shares of
Common Stock with a weighted-average exercise price of $21.72 per share and
contingently issuable stock warrants to acquire 7.6 million shares of
Common Stock have been excluded from the computation of diluted net income
per common share as their impact would be antidilutive.
For the year ended December 31, 1997, options to purchase 5.4 million
shares of Common Stock with a weighted-average exercise price of $7.25 per
share, warrants to acquire 7.6 million shares of Common Stock with a
weighted-average exercise price of $9.45 per share and contingently
issuable stock warrants to acquire 7.6
39
<PAGE>
million shares of Common Stock have been excluded from the computation of
diluted net loss per common share as their impact would be antidilutive.
For the year December 31, 1996, options to acquire 4.7 million shares of
Common Stock with a weighted-average exercise price of $6.59 per share have
been excluded from the computation of diluted net loss per common share as
their impact would be antidilutive.
Note 9. Scientific Collaboration Agreements
Abbott Laboratories
In April 1995, the Company entered into a collaborative agreement with
Abbott Laboratories, a worldwide manufacturer of health care products. The
collaboration focuses on the development of small molecules that modulate,
by an intracellular interaction, the activity of certain cell adhesion
molecules. Under the agreement, when and if developed, the Company will
have exclusive rights in the United States for all products for the
treatment of cancer, while Abbott Laboratories will have exclusive rights
outside the United States for all products for the treatment of cancer and
exclusive worldwide rights for all other products. The Company will
receive research funding, and milestone and royalty payments for products,
other than cancer treatment products, developed by Abbott Laboratories as
a result of the collaboration.
Suncos
In February 1997, the Company and Suntory Limited of Japan ("Suntory")
formed Suncos, a corporate joint venture company, for the purpose of
developing and commercializing Pafase(TM). In forming Suncos, the Company
granted a license for the Pafase(TM) technology to Suncos, and Suntory
made an initial capital contribution of $30 million. Both parties have
committed to jointly fund all development activities and expenses of
Suncos once the initial capital contribution of $30 million from Suntory
has been used. Suncos is managed jointly by Suntory and the Company. The
Company has rights to market Pafase(TM) in the United States and Suntory
has market rights in Japan. Each company will pay royalties to Suncos for
its territorial marketing rights. Suncos will retain all rights to market
the potential product in territories outside the United States and Japan.
The Company recognized research and development revenue of $14.9 million
and $11.2 million from Suncos in 1998 and 1997, respectively, of which
$3.5 million and $1.2 million was receivable at December 31, 1998 and
1997, respectively.
The technology contributed to Suncos by the Company had a zero basis for
financial reporting purposes and accordingly, the Company has recorded its
investment in Suncos as zero. The Company will not report its
proportionate share of Suncos' losses until such time that Suncos'
accumulated losses equal Suntory's investment and the Company makes
capital contributions to Suncos. Summarized financial information for
Suncos is as follows (in thousands):
<TABLE>
<CAPTION>
Financial position -- December 31, 1998 1997
--------- ---------
<S> <C> <C>
Total assets - all current $ 5,828 $ 19,470
======== ========
Total liabilities - all current, payable to related parties $ 3,781 $ 1,529
Stockholders' equity 2,047 17,941
-------- --------
$ 5,828 $ 19,470
======== ========
Operating results -- For the year ended December 31, 1998 1997
-------- --------
Operating expenses, related parties $ 16,594 $ 13,290
Other income 699 1,233
-------- --------
Net loss $(15,895) $(12,057)
======== ========
</TABLE>
ICOS Clinical Partners, L.P.
40
<PAGE>
On August 15, 1997, the Partnership completed the sale to private
investors of limited partnership interests in the Partnership. Net
proceeds from the sale are being used by the Partnership to fund continued
development of product candidates by the Company pursuant to the terms of
the Product Development Agreement based on three compounds:
LeukArrest(TM), Pafase(TM) and ICM3.
The sale will result in net proceeds to the Partnership of approximately
$79.8 million. Approximately $25.9 million, before payment of offering
costs, was paid to the Partnership at closing of the sale of the
Partnership units. The Partnership received $21.9 million in 1998 with the
balance to be received in installments over a two-year period.
In 1998, the Company recognized revenue of $15.1 million from the
Partnership. In 1997, the Company recognized revenue of $18.4 million from
the Partnership, including a one-time payment for an exclusive license to
certain technology. At December 31, 1997, the Company had a receivable
from the Partnership for development expenses incurred but not paid of
$1.0 million.
The Company loaned the Partnership an aggregate of $7.3 million to fund
certain initial expenditures of the Partnership that consist primarily of
organizational expenses, selling commissions, financial advisory fees and
other fees. The loan is full recourse to the Partnership, bears interest
at the prime rate plus 0.25% which is paid annually on June 1 and matures
on June 1, 2000. At December 31, 1998, interest income and interest
accrued on the loan was $0.6 million and $0.4 million, respectively. At
December 31, 1997, interest income and interest accrued on the loan to the
Partnership was $0.3 million.
The Company has a 1% interest in the Partnership and is the only general
partner of the Partnership.
The Company's share of losses of the Partnership was $0.2 million for both
the year ended December 31, 1998 and 1997 and is included in other
expenses, net. The investment balance of $64,130 at December 31, 1998 and
$36,688 at December 31, 1997 is included in other assets. Summarized
financial information for the Partnership is as follows (in thousands):
<TABLE>
<CAPTION>
Financial position -- December 31, 1998 1997
--------- ---------
<S> <C> <C>
Total assets - all current $ 6,350 $ 4,632
======== ========
Current liabilities payable to related party $ 364 $ 1,390
Note payable to related party 7,341 7,341
Partner's deficit (1,355) (4,099)
-------- --------
$ 6,350 $ 4,632
======== ========
Operating results -- For the year ended December 31, 1998 1997
-------- --------
Investment income $ 328 $ 291
Research and development expenses, related party 18,520 22,448
Interest expense, related party 624 345
General and administrative expenses 309 71
-------- --------
Net loss $(19,125) $(22,573)
======== ========
</TABLE>
Lilly ICOS LLC
In October 1998, the Company and Eli Lilly and Company ("Lilly") formed
Lilly ICOS, a 50/50 owned limited liability company to jointly develop and
globally commercialize phosphodiesterase type 5 inhibitors (PDE5) as oral
therapeutic agents for the treatment of both male and female sexual
dysfunction. Under the terms of the joint venture agreement, the Company
received a $75.0 million payment in October and could receive future
success milestone payments based on the progression of IC351 through
development. The joint venture is being capitalized by Lilly through cash
infusions and the contribution by the Company of intellectual property
associated with IC351 and its research platform. The joint venture will
market products resulting from this collaborative effort in North America
and Europe. For countries outside North America and Europe, products will
be licensed exclusively to Lilly for commercialization with a royalty paid
to the joint venture.
41
<PAGE>
In 1998, the Company recognized revenue of $78.8 million from Lilly ICOS
including a one-time payment of $75.0 million. At December 31, 1998, the
Company had a receivable from Lilly ICOS of $3.8 million for reimbursement
of certain development expenses incurred during 1998.
The technology contributed to Lilly ICOS by the Company had a zero basis
for financial reporting purposes and accordingly, the Company has recorded
its investment in Lilly ICOS as zero. The Company will not report its
proportionate share of Lilly ICOS' results of operations until such time
that the Company makes capital contributions to Lilly ICOS, if ever.
Summarized financial information for Lilly ICOS is as follows (in
thousands):
Financial position -- December 31, 1998
Total assets - all current $ 25,317
=========
Total liabilities - all current, payable to
related parties $ 6,822
---------
Members' equity 18,495
---------
$ 25,317
=========
Operating results -- For the year ended December 31, 1998
Research and development expenses, related parties $ 6,538
Contribution of technology, related party 175,000
Administrative expense 284
Interest income 318
---------
Net loss $(181,504)
=========
Other Collaborative Arrangements
The Company has also entered into other collaborative arrangements under
which the Company will pay royalties if product development is successful.
It is anticipated that the aggregate of any royalty payments under these
arrangements will not be material to the Company's operations.
42
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information requested by this item is incorporated by reference from the
sections labeled "Election of Directors," "Continuing Directors (until 2000),"
"Continuing Directors (until 2001)," "Other Executive Officers," "Compliance
with Section 16(a) of the Securities Exchange Act of 1934," "Compensation of
Directors," "Executive Compensation," "1998 Option Grants," "1998 Option
Exercises and Year-end Option Values," "Compensation Committee Interlocks and
Insider Participation," "Employment Contracts, Termination of Employment and
Change of Control Arrangements," "Security Ownership of Certain Beneficial
Owners and Management," and "Certain Relationships and Related Transactions" in
the Company's Proxy Statement for the Annual Meeting of Stockholders to be held
on May 6, 1999.
Item 11. Executive Compensation
The information requested by this item is incorporated by reference from the
sections labeled "Compensation of Directors," "Executive Compensation," "1998
Option Grants," "Fiscal Year-end Option Values," "Compensation Committee
Interlocks and Insider Participation," and "Employment Contracts, Termination of
Employment and Change of Control Arrangements" in the Company's Proxy Statement
for the Annual Meeting of Stockholders to be held on May 6, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information requested by this item is incorporated by reference from the
section labeled "Security Ownership of Certain Beneficial Owners and Management"
in the Company's Proxy Statement for the Annual Meeting of Stockholders to be
held on May 6, 1999.
Item 13. Certain Relationships and Related Transactions
The information requested by this item is incorporated by reference from the
section labeled "Certain Relationships and Related Transactions" in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 6, 1999.
43
<PAGE>
PART IV
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on
Form 8-K
a) 1. Consolidated Financial Statements
---------------------------------
See Index to Consolidated Financial Statements under Item 8 of
this Form 10-K.
2. Consolidated Financial Statement Schedules
------------------------------------------
See Index to Consolidated Financial Statements accompanying those
statements under Item 8 of this Form 10-K.
3. Exhibits
--------
See Index to Exhibits filed herewith.
b) Reports on Form 8-K
-------------------
One report on Form 8-K was filed during the fourth quarter of the
fiscal year ended December 31, 1998.
44
<PAGE>
<TABLE>
<CAPTION>
Index to Exhibits Page
----------------- ----
<C> <S> <C>
3.1 Restated Certificate of Incorporation of ICOS Corporation a
3.2 Restated Bylaws of ICOS Corporation a
4.1 Restated Certificate of Incorporation of ICOS Corporation (included in Exhibit 3.1)
10.1 ICOS Corporation 1989 Stock Option Plan (Amended and Restated as of January 8, 1997) g
10.2 ICOS Corporation 1991 Stock Option Plan for Non-employee Directors (Amended and Restated as of
January 8, 1997) g
10.3 Industrial Real Estate Lease dated December 20, 1996 between WRC Properties, Inc. and ICOS
Corporation j
10.4 Industrial Real Estate Lease dated August 1, 1992 between Trinity at Canyon
Park and ICOS Corporation c
10.5 Real Estate Purchase and Sale Agreement dated October 30, 1992 between Canyon
Park Business Center Limited Partnership and ICOS Corporation c
10.6 Industrial Real Estate Lease dated August 6, 1993 between John H. Harland Company and ICOS
Corporation d
10.7 Industrial Real Estate Lease Renewal and Amendment Agreement dated May 20, 1997 between
Benaroya Capital Company, L.L.C. and ICOS Corporation j
10.8 Industrial Real Estate Lease Renewal and Amendment Agreement dated August 5, 1997 between WRC
Properties, Inc. and ICOS Corporation j
10.9 Second Amendment dated October 30, 1998 to Industrial Real Estate Lease Agreement between
Teachers Insurance & Annuity Association of America, Inc., as successors to WRC Properties,
Inc., and ICOS Corporation l
10.10 Industrial Real Estate Lease Agreement dated January 7, 1999 between CarrAmerica Realty
Corporation and ICOS Corporation l
10.11 R&D Collaboration/License Agreement dated April 1, 1995 between Abbott Laboratories and ICOS
Corporation e
10.12 Shareholders Agreement, entered into December 18, 1996, among ICOS Corporation, Suntory
Limited and Suncos Corporation. g
10.13 rPAF-AH License Agreement, dated February 6, 1997, between ICOS Corporation and Suncos
Corporation g
10.14 Development and Supply Agreement, dated February 6, 1997, among ICOS Corporation, Suntory
Limited and Suncos Corporation g
10.15 ICOS Services Agreement, dated February 6, 1997, between ICOS Corporation and Suncos
Corporation g
10.16 ICOS License Agreement, dated February 6, 1997, between Suncos Corporation and ICOS Corporation g
10.17 First Amendment to R & D Collaboration/License Agreement dated April 1, 1995 between Abbott
Laboratories and ICOS Corporation h
10.18 Agreement of Limited Partnership dated as of June 5, 1997, by and among ICOS Development
Corporation, as general partner, and each of the limited partners of ICOS Clinical Partners,
L.P. i
10.19 Purchase Agreement dated as of June 5, 1997 between the Registrant and each of the Limited
Partners from time to time of ICOS Clinical Partners, L.P. i
10.20 Product Development Agreement, dated as of June 5, 1997, by and between the Registrant and
ICOS Clinical Partners, L.P. i
10.21 Limited Liability Company Agreement of Lilly ICOS LLC (the "LLC Agreement") dated September
30, 1998 between ICOS Corporation and Eli Lilly and Company, including Exhibit E thereto. k
10.22 Lilly License Agreement, dated September 30, 1998, between Lilly ICOS LLC and Eli Lilly and
Company (Exhibit A to the LLC Agreement). k
10.23 The PDE5 License Agreement, dated September 30, 1998, between ICOS Corporation and Lilly ICOS
LLC (Exhibit B to the LLC Agreement). k
10.24 Research and Development Agreement, dated September 30, 1998, among ICOS Corporation, Lilly
ICOS LLC and Eli Lilly and Company (Exhibit C to the LLC Agreement). k
</TABLE>
45
<PAGE>
<TABLE>
<C> <S> <C>
10.25 Marketing and Sales Service Agreement, dated September 30, 1998, between ICOS Corporation,
Lilly ICOS LLC, and Eli Lilly and Company (Exhibit F to the LLC Agreement). k
23.1 Consent of KPMG LLP 49
27.1 Financial Data Schedule l
</TABLE>
see below for explanatory notes
- -------------------------
a Filed as an exhibit to the Company's Registration Statement (Registration
No. 333-3312) effective May 7, 1996 and incorporated herein by reference.
b Filed as an exhibit to the Company's Registration Statement (Registration
No. 333-08485) effective July 19, 1996 and incorporated herein by
reference.
c Filed as an exhibit to the Company's Form 10-K Annual Report on March 29,
1993 and incorporated herein by reference.
d Filed as an exhibit to the Company's Form 10-Q Quarterly Report on
November 2, 1993 and incorporated herein by reference.
e Filed as an exhibit to the Company's Form 10-Q Quarterly Report on May 12,
1995 and incorporated herein by reference.
f Filed as an exhibit to the Company's Form 10-K Annual Report on March 29,
1996 and incorporated herein by reference.
g Filed as an exhibit to the Company's Form 10-K Annual Report on March 28,
1997 and incorporated herein by reference.
h Filed as an exhibit to the Company's Form 10-Q Quarterly Report on August
14, 1997 and incorporated herein by reference.
i Filed as an exhibit to the Company's Form 8-K Current Report on August 26,
1997 and incorporated herein by reference.
j Filed as an exhibit to the Company's Form 10-Q Quarterly Report on November
14, 1997 and incorporated herein by reference.
k Filed as an exhibit to the Company's Form 10-Q Quarterly Report on November
13, 1998 and incorporated herein by reference.
l Filed with this document.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Bothell,
State of Washington, on the 31st day of March, 1999.
ICOS CORPORATION
(Registrant)
By: /S/ GEORGE B. RATHMANN
------------------------------------
George B. Rathmann
Chairman of the Board of Directors,
Chief Executive Officer and President
47
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/S/ GEORGE B. RATHMANN Chairman of the Board of Directors, March 31, 1999
- ------------------------------------ Chief Executive Officer and President
George B. Rathmann (Principal Executive Officer)
/S/ GARY L. WILCOX Director and Executive Vice President, March 31, 1999
- ------------------------------------ Operations
Gary L. Wilcox
/S/ HOWARD S. MENDELSOHN Chief Accounting Officer March 31, 1999
- ------------------------------------ (Principal Accounting Officer)
Howard S. Mendelsohn
/S/ FRANK T. CARY Director March 31, 1999
- -------------------------------------
Frank T. Cary
/S/ JAMES L. FERGUSON Director March 31, 1999
- -------------------------------------
James L. Ferguson
/S/ WILLIAM H. GATES, III Director March 31, 1999
- -------------------------------------
William H. Gates, III
/S/ JANICE M. LECOCQ Director March 31, 1999
- -------------------------------------
Janice M. LeCocq
/S/ DAVID V. MILLIGAN Director March 31, 1999
- -------------------------------------
David V. Milligan
/S/ ROBERT W. PANGIA Director March 31, 1999
- -------------------------------------
Robert W. Pangia
/S/ ALEXANDER B. TROWBRIDGE Director March 31, 1999
- -------------------------------------
Alexander B. Trowbridge
/S/ WALTER B. WRISTON Director March 31, 1999
- -------------------------------------
Walter B. Wriston
</TABLE>
48
<PAGE>
Exhibit 10.9
SECOND AMENDMENT TO LEASE
This SECOND AMENDMENT TO LEASE (this "Second Amendment") is made this 30th
day of October, 1998, by and between TEACHERS INSURANCE & ANNUITY ASSOCIATION OF
AMERICA, INC., as successor to WRC PROPERTIES, INC. ("Landlord") and ICOS
CORPORATION ("Tenant").
Recitals
--------
Landlord is landlord and Tenant is tenant under that certain Lease dated
for reference purposes December 20, 1996, as amended by First Amendment to Lease
dated August 5, 1997 (collectively the "Premier South Lease"), for premises
located at 22025 20th Avenue SE, Bothell, Washington 98021 (the "Property").
The legal description of the land on which the Property is located is attached
hereto as Exhibit A.
Tenant wishes to add to the Property, effective February 8, 1999, an
additional agreed 25,466 Rentable Square Feet shown in crosshatching on Exhibit
B hereto (the "Expansion Property"), such that the Property shall, after such
addition, consist of an agreed 42,962 Rentable Square Feet, all as outlined in
black on Exhibit B hereto.
Landlord has agreed to such expansion all on the terms and conditions set
forth herein.
Except as specifically set forth herein, all capitalized terms used herein
shall have the meanings assigned in the Lease.
Agreement
---------
NOW THEREFORE, for good and valuable consideration the parties hereto agree
as follows:
1. On February 8, 1999, the Expansion Property shall be added to the
Property, such that the Property under Section 1.04 of the Lease shall include
all of the area outlined in black on Exhibit B and shall consist of an agreed
42,962 Rentable Square Feet.
2. The Project square footage as referenced in Rider 1 to the Lease dated
December 20, 1996 shall be amended to approximately 93,259 Rentable Square Feet.
3. Simultaneous with addition of the Expansion Property, Tenant's pro rata
share, as used to allocate all items of Additional Rent under the Lease
(including Common Area Costs pursuant to Section 4.05(e) of Rider 1 of the
Lease) shall be recalculated to reflect the addition of the Expansion Property
and Tenant's pro rata share shall thereafter be 46.07%.
4. Landlord shall make up to Sixty Three Thousand Six Hundred Sixty Five
Dollars ($63,665) (the "Tenant Improvement Allowance") available to Tenant to
reimburse Tenant for actual out-of-pocket costs paid to third parties for
designing and constructing tenant improvements to the Expansion Property
pursuant to plans reasonably approved by Landlord and otherwise subject to the
provisions of Section 6.05 of the Lease. Landlord shall pay the Tenant
Improvement Allowance within thirty (30) days of invoice submitted after the
improvements have been inspected and accepted by Tenant (less minor punch list
items). The Tenant Improvement Allowance shall be available on a one-time basis
for improvements to the Expansion Premises constructed during the past twelve
months by Tenant which were approved by Landlord.
5. Tenant acknowledges that it has been occupying the Expansion Premises
pursuant to a sublease, and that it accepts the Expansion Premises "as-is, where
is", and that Landlord has not made any representation regarding nor undertaken
any obligation to improve or modify the Expansion Premises.
<PAGE>
6. The Base Rent under Section 1.13 of the Lease shall be calculated
without reference to this Second Amendment until February 8, 1999 and thereafter
shall be as follows:
<TABLE>
<S> <C>
February 8, 1999 to January 9, 2000 $48,229
January 10, 2000 to February 7, 2001 $49,780
February 8, 2001 to January 9, 2002 $52,252
January 10, 2002 to February 7, 2003 $53,458
February 8, 2003 to February 9, 2004 $56,133
</TABLE>
7. Except as specifically set forth herein, all terms and conditions of
the Lease are and remain in full force and effect.
Landlord:
TEACHERS INSURANCE & ANNUITY ASSOCIATION
OF AMERICA, INC.
By: /s/ James Garofalo
-------------------------------------
James Garofalo
Its: Assistant Secretary
Tenant:
ICOS CORPORATION
By: /s/ Gary Wilcox
--------------------------------------
Gary Wilcox
Its: Executive Vice President/Operations
<PAGE>
STATE OF New York )
--------------
) ss.
COUNTY OF New York )
--------------
I certify that I know or have satisfactory evidence that James Garofalo is
the person who appeared before me, and said person acknowledged that he signed
this instrument, on oath stated that he was authorized to execute the instrument
and acknowledged it as the Assistant Secretary of Teachers Insurance & Annuity
Association of America, Inc. to be the free and voluntary act of such party for
the uses and purposes mentioned in the instrument.
Dated: 12/21/98
--------------------------------
/s/ Marian Useloff
--------------------------------------
(Signature)
/s/ Marian Useloff
--------------------------------------
(Print Name)
Notary Public, in and for the State of
NY , residing at NY County
My Commission Expires 3/30/00
STATE OF WASHINGTON )
) ss.
COUNTY OF SNOHOMISH )
I certify that I know or have satisfactory evidence that Mr. Gary Wilcox is
the person who appeared before me, and said person acknowledged that he signed
this instrument, on oath stated that he was authorized to execute the instrument
and acknowledged it as the Executive Vice President/Operations of ICOS
Corporation to be the free and voluntary act of such party for the uses and
purposes mentioned in the instrument.
Dated: 11/3/98
--------------------------------
/s/ Lori L. Briseno
--------------------------------------
(Signature)
/s/ Lori L. Briseno
--------------------------------------
(Print Name)
Notary Public, in and for the State
of Washington, residing at Snohomish
My Commission Expires 4/29/02
<PAGE>
EXHIBIT A
(The "Premises")
To be attached.
<PAGE>
EXHIBIT B
(the "Expansion Property")
Cross hatched area denotes Expansion Premises
<PAGE>
Exhibit 10.10
* * * * * * * * * * * * * * * * *
LEASE AGREEMENT
* * * * * * * * * * * * * * * * *
Between
ICOS Corporation
(Tenant)
and
CarrAmerica Realty Corporation
(Landlord)
Dated: January 7, 1999
PAGE i
<PAGE>
CONTENTS
<TABLE>
<C> <S> <C>
1. Lease Agreement ........................................................... 3
2. Rent ...................................................................... 3
A. Types of Rent........................................................... 3
(1) Base Rent.......................................................... 3
(2) Operating Cost Share Rent.......................................... 3
(3) Tax Share Rent..................................................... 3
(4) Additional Rent.................................................... 3
(5) Rent............................................................... 4
B. Payment of Operating Cost Share Rent and Tax Share Rent................. 4
(1) Payment of Estimated Operating Cost Share Rent and Tax Share Rent.. 4
(2) Correction of Operating Cost Share Rent............................ 4
(3) Correction of Tax Share Rent....................................... 4
C. Definitions............................................................. 5
(1) Included Operating Costs........................................... 5
(2) Excluded Operating Costs........................................... 5
(3) Taxes.............................................................. 7
(4) Lease Year......................................................... 7
(5) Fiscal Year........................................................ 7
D. Computation of Base Rent and Rent Adjustments........................... 7
(1) Prorations......................................................... 8
(2) Default Interest................................................... 8
(3) Rent Adjustments................................................... 8
(4) Books and Records.................................................. 8
(5) Miscellaneous...................................................... 8
3. Preparation and Condition of Premises; Maintenance; Possession and
Surrender of Premises........................................................ 9
A. Condition of Premises.................................................. 9
B. Tenant's Possession.................................................... 9
C. Tenant's Maintenance................................................... 9
D. Landlord's Maintenance ................................................ 9
4. Project Services............................................................. 10
A. Heating and Air Conditioning........................................... 10
B. Electricity............................................................ 10
C. Water.................................................................. 10
D. Janitorial Service..................................................... 10
E. Interruption of Services............................................... 10
5. Alterations and Repairs...................................................... 10
A. Landlord's Consent and Conditions...................................... 10
</TABLE>
PAGE ii
<PAGE>
<TABLE>
<C> <S> <C>
B. Damage to Systems...................................................... 12
C. No Liens............................................................... 12
D. Ownership of Improvements.............................................. 12
E. Removal at Termination................................................. 13
6. Use of Premises.............................................................. 13
7. Governmental Requirements and Building Rules................................. 13
8. Waiver of Claims; Indemnification; Insurance................................. 14
A. Indemnification........................................................ 14
B. Tenant's Insurance..................................................... 15
C. Insurance Certificates................................................. 16
D. Landlord's Insurance................................................... 16
E. ....................................................................... 16
9. Fire and other Casualty...................................................... 17
A. Termination............................................................ 17
B. Restoration............................................................ 17
10. Eminent Domain............................................................... 17
11. Rights Reserved to Landlord.................................................. 18
A. Name................................................................... 18
B. Signs.................................................................. 18
C. Window Treatments...................................................... 18
D. Keys................................................................... 18
E. Access................................................................. 18
F. Preparation for Reoccupancy............................................ 18
G. Heavy Articles......................................................... 18
H. Show Premises.......................................................... 19
I. Relocation of Tenant................................................... 19
J. Use of Lockbox......................................................... 19
K. Repairs................................................................ 19
L. Landlord's Agents...................................................... 19
M. Building Services...................................................... 19
N. Other Actions.......................................................... 19
12. Tenant's Default............................................................. 20
A. Rent Default........................................................... 20
B. Other Performance Default.............................................. 20
C. Credit Default......................................................... 20
D. Abandonment Default.................................................... 20
13. Landlord Remedies............................................................ 20
A. Termination of Lease or Possession..................................... 20
B. Lease Termination Damages.............................................. 20
</TABLE>
PAGE iii
<PAGE>
<TABLE>
<C> <S> <C>
C. Possession Termination Damages......................................... 21
D. Landlord's Remedies Cumulative......................................... 21
E. Litigation Costs....................................................... 21
14. Surrender.................................................................... 21
15. Holdover..................................................................... 22
16. Subordination to Ground Leases and Mortgages................................. 22
A. Subordination.......................................................... 22
B. Security Deposit....................................................... 22
C. Notice and Right to Cure............................................... 22
D. Definitions............................................................ 23
17. Assignment and Sublease...................................................... 23
A. In General............................................................. 23
B. Landlord's Consent..................................................... 23
C. Procedure.............................................................. 23
D. Change of Management or Ownership...................................... 24
E. Tenant Affiliate....................................................... 24
F. Recapture.............................................................. 24
G. Sublease to Seattle Genetics........................................... 24
18. Conveyance by Landlord....................................................... 24
19. Estoppel Certificate......................................................... 25
20. Security Deposit............................................................. 25
21. Force Majeure................................................................ 25
22. Landlord's Default........................................................... 26
23. Notices...................................................................... 26
A. Landlord............................................................... 26
B. Tenant................................................................. 27
24. Quiet Possession............................................................. 27
25. Real Estate Broker........................................................... 27
26. Miscellaneous................................................................ 27
A. Successors and Assigns................................................. 27
B. Date Payments Are Due.................................................. 27
C. Meaning of "Landlord", "Re-Entry, "including" and "Control"............ 28
D. Time of the Essence.................................................... 28
E. No Option.............................................................. 28
F. Severability........................................................... 28
G. Governing Law.......................................................... 28
</TABLE>
PAGE iv
<PAGE>
<TABLE>
<C> <S> <C>
H. Attorneys' Fees........................................................ 28
I. No Oral Modification................................................... 28
J. Landlord's Right to Cure............................................... 28
K. Captions............................................................... 28
L. Authority.............................................................. 28
M. Landlord's Enforcement of Remedies..................................... 28
N. Entire Agreement....................................................... 29
O. Landlord's Title....................................................... 29
P. Light and Air Rights................................................... 29
Q. Singular and Plural.................................................... 29
R. No Recording by Tenant; Memorandum of Lease............................ 29
S. Exclusivity............................................................ 29
T. No Construction Against Drafting Party................................. 29
U. Survival............................................................... 29
V. Rent Not Based on Income............................................... 29
W. Building Manager and Service Providers................................. 29
X. Late Charge and Interest on Late Payments.............................. 30
Y. Tenant's Financial Statements.......................................... 30
Z. Parking................................................................ 30
27. Unrelated Business Income.................................................... 30
28. Hazardous Substances......................................................... 30
29. Exculpation.................................................................. 31
30 Attachments.................................................................. 31
APPENDIX A - Plan of the Premises and the Project
APPENDIX B - Rules and Regulations
APPENDIX C - Tenant Improvement Agreement
APPENDIX D - Mortgages Currently Affecting the Project
APPENDIX E - Commencement Date Confirmation
APPENDIX F - Legal Description
ADDENDUM 1 - Extension Option
</TABLE>
PAGE v
<PAGE>
LEASE
THIS LEASE (the "Lease") is made as of January 7, 1999 between CARRAMERICA
REALTY CORPORATION, a Maryland corporation (the "Landlord") and the Tenant as
named in the Schedule below. The term "Project" means the building (the
"Building") known as Canyon Park East Building D and the land (the "Land")
located at 22215 26th Avenue SE, Bothell, Washington on which the Building is
located. The Project is legally described on Appendix F hereto. "Premises"
means that part of the Project leased to Tenant described in the Schedule and
outlined on Appendix A.
The following schedule (the "Schedule") is an integral part of this Lease.
Terms defined in this Schedule shall have the same meaning throughout the Lease.
SCHEDULE
1. Tenant: ICOS Corporation
2. Premises: Canyon Park East, Building D
On the Commencement Date, Landlord shall deliver to Tenant possession
of the entire Premises consisting of 89,786 square feet; provided,
however, that Tenant's occupancy of 8,913 square feet of Premises area
depicted on the attached Appendix A (the "Expansion Space") and
Tenant's obligation to pay Base Rent for the same shall be delayed
until December 31, 1999, unless Tenant, upon not less than fifteen
(15) days' prior written notice to Landlord, elects to occupy the
Expansion Space before December 31, 1999. Tenant's notice shall
specifically set forth the date of Tenant's intended occupancy of the
Expansion Space. Upon Tenant's occupancy of the Expansion Space,
Tenant's obligation for Base Rent shall increase to the amounts
payable for months 13-36 in Section 12 of the Schedule.
3. Rentable Square Feet of the Premises: 89,786, inclusive of 8,913
square feet of Expansion Space.
4. Tenant's Proportionate Share: From and after the Commencement Date,
regardless of when Tenant takes possession of the Expansion Space, (a)
100.00% (based upon a total of approximately 89,786 square feet in the
Building), as to all Operating Costs as defined in Section 2B, 2C and
2D relating specifically to Building D including, without limitation,
HVAC maintenance and repairs, building management fee (not to exceed
3% of Base Rent, Operating Cost Share Rent and Tax Share Rent),
supplies, window cleaning, property insurance, landscape costs,
parking lot repair and
PAGE 1
<PAGE>
maintenance, Landlord's liability insurance costs, and Taxes, and (b)
an amount fairly and equitably apportioned by Landlord, of Landlord's
administration and overhead costs, based on the square feet in the
Premises and the total square feet in the remainder of the buildings
in the Landlord's portfolio.
5. Security Deposit: $100,000.00.
6. Tenant's Real Estate Broker for this Lease: None.
7. Landlord's Real Estate Broker for this Lease: None.
8. Tenant Improvements, if any: Landlord shall provide the Building Shell
and Tenant Improvement in an "As Is" condition and Landlord makes no
representations or warranties as to the suitability for Tenant's use.
9. Commencement Date: January 7, 1999.
10. Termination Date/Term: Five (5) years after the Commencement Date, or
if the Commencement Date is not the first day of a month, then five
(5) years after the first day of the month following the month in
which the Commencement Date occurs.
11. Guarantor: None.
12. Base Rent:
<TABLE>
<CAPTION>
Annual Monthly
Period Square Footage Rate Base Rent Base Rent
- ----------------------- ------------------ --------------- -------------------- ------------------
<S> <C> <C> <C> <C>
Partial Month
January 1999 80,873 $0.00 $ 0.00 $ 0.00
Month 1 80,873 $0.00 $ 0.00 $ 0.00
Month 2 80,873 $16.00/nnn $1,216,435.70 $ 98,639.77*
Months 3-12 80,873 $16.00/nnn $1,293,968.04 $107,830.67
Months 13-36 89,786 $16.00/nnn $1,436,576.00 $119,714.67
Months 37-60 89,786 $17.76/nnn $1,594,599.36 $132,883.28
</TABLE>
* subject to Section 2 of the Schedule
PAGE 2
<PAGE>
1. LEASE AGREEMENT. On the terms stated in this Lease, Landlord leases
the Premises to Tenant, and Tenant leases the Premises from Landlord, for the
Term beginning on the Commencement Date and ending on the Termination Date
unless extended or sooner terminated pursuant to this Lease.
2. RENT.
A. Types of Rent. Tenant shall pay the following Rent in the form of a
check to Landlord at the following address:
CarrAmerica Realty Corporation
t/a Canyon Park East
P.O. Box 100267
Atlanta, GA 30384-0566
or, at Tenant's option, by wire transfer as follows:
NationsBank, N.A. (South)
ABA Number 061-000-052
Account Number 00 325 580 8067
or to such other address as Landlord may notify Tenant:
(1) Base Rent in monthly installments in advance, the first monthly
installment payable within ten (10) days after approval by the Bankruptcy
Court of the Lease Termination Agreement and thereafter, on or before the
first day of each month of the Term in the amount set forth on the
Schedule.
(2) Operating Cost Share Rent in an amount equal to the Tenant's
Proportionate Share of the Operating Costs for that portion of the
applicable fiscal year of the Lease that falls within the Lease Term, paid
monthly in advance in an estimated amount. Definitions of Operating Costs
and Tenant's Proportionate Share, and the method for billing and payment of
Operating Cost Share Rent are set forth in Sections 2B, 2C and 2D.
(3) Tax Share Rent in an amount equal to the Tenant's Proportionate
Share of the Taxes for that portion of the applicable fiscal year of this
Lease that falls within the Lease Term, paid monthly in advance in an
estimated amount. A definition of Taxes and the method for billing and
payment of Tax Share Rent are set forth in Sections 2B, 2C and 2D.
(4) Additional Rent in the amount of all costs, expenses, liabilities,
and amounts which Tenant is required to pay under this Lease, excluding
Base Rent,
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Operating Cost Share Rent, and Tax Share Rent, but including any interest
for late payment of any item of Rent.
(5) Rent as used in this Lease means Base Rent, Operating Cost Share
Rent, Tax Share Rent and Additional Rent. Tenant's agreement to pay Rent
is an independent covenant, with no right of setoff or deduction of any
kind, except as may be otherwise expressly provided in this Lease.
B. Payment of Operating Cost Share Rent and Tax Share Rent.
(1) Payment of Estimated Operating Cost Share Rent and Tax Share Rent.
Landlord shall estimate the Operating Costs and Taxes of the Project by
April 1 of each fiscal year, or as soon as reasonably possible thereafter.
Landlord may revise these estimates whenever it obtains more accurate
information, such as the final real estate tax assessment or tax rate for
the Project, and shall use reasonable efforts to do so when and if it
becomes apparent to Landlord that Operating Costs and Taxes of the Project
shall substantially vary from Landlord's previous estimate.
Within thirty (30) days after receiving the original or revised
estimate from Landlord, Tenant shall pay Landlord one-twelfth (1/12th) of
Tenant's Proportionate Share of this estimate, multiplied by the number of
months that have elapsed in the applicable fiscal year to the date of such
payment including the current month, minus payments previously made by
Tenant for the months elapsed. On the first day of each month thereafter,
Tenant shall pay Landlord one-twelfth (1/12th) of Tenant's Proportionate
Share of this estimate, until a new estimate becomes applicable.
Commencing on the Commencement Date, and until a new estimate becomes
applicable, Tenant shall pay Landlord Tenant's Proportionate Share of
estimated Operating Costs and Taxes for the Project.
(2) Correction of Operating Cost Share Rent. Landlord shall deliver
to Tenant a report for the previous fiscal year (the "Operating Cost
Report") by May 15 of each year, or as soon as reasonably possible
thereafter, setting forth (a) the actual Operating Costs incurred, (b) the
amount of Operating Cost Share Rent due from Tenant for the previous fiscal
year or portion thereof, and (c) the amount of Operating Cost Share Rent
paid by Tenant for the previous fiscal year or portion thereof. Within
thirty (30) days after such delivery, Tenant shall pay to Landlord the
amount due minus the amount paid. If the amount paid exceeds the amount
due, Landlord shall apply the excess to Tenant's payments of Rent next
coming due.
(3) Correction of Tax Share Rent. Landlord shall deliver to Tenant a
report for the previous fiscal year (the "Tax Report") by May 15 of each
year, or as soon as reasonably possible thereafter, setting forth (a) the
actual Taxes, (b) the amount of Tax Share Rent due from Tenant for the
previous fiscal year or portion thereof, and (c) the amount of Tax Share
Rent paid by Tenant for the previous fiscal
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year or portion thereof. Within thirty (30) days after such delivery,
Tenant shall pay to Landlord the amount due from Tenant minus the amount
paid by Tenant. If the amount paid exceeds the amount due, Landlord shall
apply the excess to Tenant's payments of Rent next coming due.
C. Definitions.
(1) Included Operating Costs. "Operating Costs" means the reasonable
expenses, costs and disbursements of any kind other than Taxes, paid or
incurred by Landlord in connection with the management, maintenance,
operation, insurance, repair and other related activities in connection
with any part of the Project and of the personal property, fixtures,
machinery, equipment, systems and apparatus used in connection therewith,
including the reasonable cost of providing those services required to be
furnished by Landlord under this Lease. Operating Costs shall also include
the costs of any capital improvements which are intended to reduce
Operating Costs or improve safety, and those made to keep the Project in
compliance with governmental requirements applicable from time to time
(collectively, "Included Capital Items"); provided, that the costs of any
Included Capital Item shall be amortized by Landlord, together with an
amount equal to interest at two percent (2%) above SeaFirst's prime rate of
interest per annum, over the estimated useful life of such item and such
amortized costs are only included in Operating Costs for that portion of
the useful life of the Included Capital Item which falls within the Term.
(2) Excluded Operating Costs. Operating Costs shall not include:
(a) costs of alterations of tenant premises;
(b) costs of capital improvements other than Included Capital Items;
(c) interest and principal payments on mortgages or any other debt
costs, or rental payments on any ground lease of the Project;
(d) real estate brokers' leasing commissions;
(e) legal fees, space planner fees and advertising expenses incurred
with regard to leasing the Building or portions thereof;
(f) any cost or expenditure for which Landlord is reimbursed, by
insurance proceeds or otherwise, except by Operating Cost Share
Rent;
(g) the cost of any service furnished to any office tenant of the
Project which Landlord does not make available to Tenant;
(h) depreciation (except on any Included Capital Items);
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(i) estate, inheritance, franchise or income taxes imposed upon
Landlord, except to the extent imposed in lieu of all or any part
of Taxes;
(j) costs of correcting defects in construction of the Building (as
opposed to the cost of normal repair, maintenance and replacement
expected with the construction materials and equipment installed
in the Building in light of their specifications);
(k) legal and auditing fees which are for the benefit of Landlord,
such as collecting delinquent rents, preparing tax returns and
other financial statements, and audits other than those incurred
in connection with the preparation of reports required pursuant
to Section 2B above;
(l) the wages of any employee for services not related directly to
the management, maintenance, operation and repair of the
Building;
(m) more than $100,000 per year, in cost of repairs or other work
occasioned by fire, windstorm, earthquake, flood or other
casualty or loss in excess of any insurance proceeds therefor
(or, if greater, the proceeds that would have been available had
Landlord maintained the insurance required to be maintained by
Landlord pursuant to this Lease), or by the exercise of eminent
domain;
(n) wages, salaries and other compensation paid to employees of the
Landlord at the Building who are above the level of property
manager, subject, however, to Section 4(b) of the Schedule;
(o) the cost of defending against claims in regard to the existence
or release of hazardous substances or materials at the Building
and costs of any clean-up of any such hazardous substances or
materials (except with respect to those costs for which Tenant is
otherwise responsible pursuant to the express terms of this
Lease);
(p) costs and expenses incurred in connection with compliance with or
the contesting or settlement of any claimed violation of law or
requirements of law, except for any claimed violation of law or
requirements of law caused by Tenant. Nothing in this Section
2.C.(2)(p) shall preclude Landlord from including in Operating
Expenses any costs or expenses made to keep the Project in
compliance with governmental requirements in effect from time to
time;
(q) interest, fines, penalties or damages incurred by Landlord for
late payment of taxes or assessments or under any agreement to
which Landlord is a party by reason of the breach or default of
Landlord;
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(r) amounts received by Landlord through proceeds of insurance to the
extent the proceeds are compensation for expenses which were
previously included in Building operating costs charged to
tenants; and
(s) all other items for which Tenant or any other tenant, occupant or
other party compensates Landlord, so that no duplication of
payments by Tenant or to Landlord shall occur.
(3) Taxes. "Taxes" means any and all taxes, assessments and charges
of any kind, general or special, ordinary or extraordinary, levied against
the Project, which Landlord shall pay or become obligated to pay in
connection with the ownership, leasing, renting, management, use,
occupancy, control or operation of the Project or of the personal property,
fixtures, machinery, equipment, systems and apparatus used in connection
therewith. Taxes shall include real estate taxes, personal property taxes,
sewer rents, water rents, special or general assessments, transit taxes, ad
valorem taxes, and any tax levied on the rents hereunder or the interest of
Landlord under this Lease (the "Rent Tax"). Taxes shall also include all
fees and other costs and expenses paid by Landlord in reviewing any tax and
in seeking a refund or reduction of any Taxes, whether or not the Landlord
is ultimately successful.
For any fiscal year, the amount to be included in Taxes (a) from taxes
or assessments payable in installments, shall be the amount of the
installments (with any interest) due and payable during such fiscal year,
and (b) from all other Taxes, shall be the amount due and payable in such
year. Any refund or other adjustment to any Taxes by the taxing authority
shall apply during the year in which the adjustment is made.
Taxes shall not include any income (except Rent Tax), capital, stock,
succession, transfer, franchise, gift, estate or inheritance tax, except to
the extent that such tax shall be imposed in lieu of any portion of Taxes.
(4) Lease Year. "Lease Year" means each consecutive twelve-month
period beginning with the Commencement Date, except that if the
Commencement Date is not the first day of a calendar month, then the first
Lease Year shall be the period from the Commencement Date through the final
day of the twelve months after the first day of the month following the
month in which the Commencement Date occurs, and each subsequent Lease Year
shall be the twelve months following the prior Lease Year.
(5) Fiscal Year. "Fiscal Year" means the calendar year, except that
the first fiscal year and the last fiscal year of the Term may be a partial
calendar year.
D. Computation of Base Rent and Rent Adjustments.
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(1) Prorations. If this Lease begins on a day other than the first
day of a month, the Base Rent, Operating Cost Share Rent and Tax Share Rent
shall be prorated for such partial month based on the actual number of days
in such month. If this Lease begins on a day other than the first day, or
ends on a day other than the last day, of the fiscal year, Operating Cost
Share Rent and Tax Share Rent shall be prorated for the applicable fiscal
year.
(2) Default Interest. Any Base Rent due from Tenant to Landlord and
any other amounts due and payable with such Base Rent payments, including
Operating Cost Share Rent and Tax Share Rent not paid within fifteen (15)
days after the date due shall bear interest from the date due until paid at
twelve percent (12%) per annum.
(3) Rent Adjustments. If any Operating Cost paid in one fiscal year
relates to more than one fiscal year, Landlord shall proportionately
allocate such Operating Cost among the related fiscal years.
(4) Books and Records. Landlord shall maintain books and records
reflecting the Operating Costs and Taxes in accordance with sound
accounting and management practices. Tenant and its certified public
accountant shall have the right to inspect Landlord's records at Landlord's
office upon at least seventy-two (72) hours' prior notice during normal
business hours during the one hundred twenty (120) days following the
respective delivery of the Operating Cost Report or the Tax Report. The
results of any such inspection shall be kept strictly confidential by
Tenant and its agents, and Tenant and its certified public accountant must
agree, in their contract for such services, to such confidentiality
restrictions and shall specifically agree that the results shall not be
made available to any other tenant of the Building. Unless Tenant sends to
Landlord any written exception to either such report within said one
hundred twenty (120) day period, such report shall be deemed final and
accepted by Tenant. Tenant shall pay the amount shown on both reports in
the manner prescribed in this Lease, whether or not Tenant takes any such
written exception, without any prejudice to such exception. If Tenant
makes a timely exception, Landlord shall cause an independent certified
public accountant to issue a final and conclusive resolution of Tenant's
exception. Tenant shall pay the reasonable cost of such certification
unless Landlord's original determination of annual Operating Costs or Taxes
overstated the amounts thereof by more than five percent (5%). Landlord
shall refund any overpayment made by Tenant promptly.
(5) Miscellaneous. So long as Tenant is in Default of any obligation
under this Lease, Tenant shall not be entitled to any refund of any amount
from Landlord. If the Term expires, or if this Lease is terminated for any
reason, prior to the annual determination of Operating Cost Share Rent or
Tax Share Rent, either party shall pay the full amount due to the other
within fifteen (15) days after
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Landlord's notice to Tenant of the amount when it is determined. Landlord
may commingle any payments made with respect to Operating Cost Share Rent
or Tax Share Rent, without payment of interest.
3. PREPARATION AND CONDITION OF PREMISES; MAINTENANCE; POSSESSION AND
SURRENDER OF PREMISES.
A. Condition of Premises. Landlord is leasing the Premises to Tenant "as
is", without any obligation to alter, remodel, improve, repair or decorate any
part of the Premises, except to the extent of Landlord's maintenance obligations
under Section 3D below.
B. Tenant's Possession. Tenant's taking possession of any portion of the
Premises on or after the Commencement Date shall be conclusive evidence that the
Premises was in good order, repair and condition. If Landlord authorizes Tenant
to take possession of any part of the Premises prior to the Commencement Date
for purposes of doing business, all terms of this Lease shall apply to such pre-
Term possession, excluding Base Rent, Operating Cost Share Rent and Tax Share
Rent.
C. Tenant's Maintenance. Throughout the Term, subject to Landlord's
maintenance obligations under Section 3D below, and pursuant to Section 5B,
Tenant shall maintain the Premises in good condition, loss or damage caused by
the elements, ordinary wear and tear, and fire and other casualty excepted.
Tenant's obligations shall include maintenance and repair of the electrical,
plumbing and sewage systems, the heating, ventilating and air conditioning
systems, elevators, alarm monitoring systems, lobbies, stairwells, and
restrooms. At the termination of this Lease, or Tenant's right to possession,
Tenant shall return the Premises to Landlord in good broom-clean condition, loss
or damage caused by the elements, ordinary wear and tear, and fire and other
casualty excepted. To the extent Tenant fails to perform its obligations,
Landlord may, but need not, restore the Premises to such condition and Tenant
shall pay the cost thereof.
D. Landlord's Maintenance. Subject to Tenant's reimbursement as part of
Operating Cost Share Rent, to the extent permitted in this Lease, Landlord shall
maintain in good condition (ordinary wear and tear and damage caused by fire and
other casualty excepted) the structural and exterior components of the Building
including, without limitation, the foundations, bearing and exterior walls,
subflooring, roof, and unexposed (below grade) electrical, plumbing and sewage
systems. Landlord shall also maintain in good condition and repair the exterior
common areas (including light bulbs attached to the outside of the Building and
located in the parking lots), parking areas, and outdoor landscaping. Landlord
shall not be obligated to repair or replace any fixtures or equipment installed
by or for Tenant and Landlord shall not be obligated to make any repair or
replacement occasioned by any act or omission of Tenant, its employees, agents,
contractors, invitees, or licensees.
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4. PROJECT SERVICES.
A. Heating and Air Conditioning. Landlord shall provide heating and air
conditioning equipment sufficient to provide a comfortable temperature for
normal business operations, except to the extent Tenant installs equipment which
adversely affects the temperature maintained by the air conditioning system. If
Tenant installs such equipment, Landlord may install supplementary air
conditioning units in the Premises, and Tenant shall pay to Landlord upon demand
as Additional Rent the cost of installation, operation and maintenance thereof.
B. Electricity. Landlord shall provide sufficient electricity to operate
office lighting and the equipment located in the Premises on the Commencement
Date. If additional electrical capacity is needed by Tenant, Landlord will
reasonably cooperate with Tenant in providing, at Tenant's expense, such
additional capacity.
C. Water. Landlord shall furnish hot and cold tap water for laboratory,
drinking and toilet purposes.
D. Janitorial Service. Tenant shall furnish its own janitorial service.
E. Interruption of Services. If any of the Building equipment or
machinery for which Landlord is responsible, ceases to function properly for any
cause Landlord shall use reasonable diligence to repair the same promptly.
Landlord's inability to furnish, to any extent, the Project services for which
Landlord is responsible, as set forth in this Section 4, or any cessation
thereof resulting from any causes, including, without limitation, any entry for
repairs pursuant to this Lease, and any renovation, redecoration or
rehabilitation of any area of the Building shall not render Landlord liable for
damages to either person or property or for interruption or loss to Tenant's
business, nor be construed as an eviction of Tenant, nor work an abatement of
any portion of Rent, nor relieve Tenant from fulfillment of any covenant or
agreement hereof. However, in the event that an interruption of the Project
services set forth in this Section 4 causes the Premises to be untenantable for
Tenant's intended use for more than three (3) consecutive business days, and
such interruption was not caused by Tenant, its agents, employees, contractors,
or invitees, Rent shall abate for the period of time thereafter that the
Premises are untenantable.
5. ALTERATIONS AND REPAIRS.
A. Landlord's Consent and Conditions.
Tenant shall not make any improvements or alterations to the Premises (the
"Work") without in each instance submitting in advance plans and specifications
for the Work to Landlord, and without obtaining Landlord's prior written consent
which shall not be unreasonably withheld or delayed, except that Landlord's
consent shall not be required for interior, nonstructural alterations that do
not exceed Fifty Thousand Dollars ($50,000) in cost
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per project so long as (a) such Work does not impact the base structural
components or systems of the Building (provided, however, that Tenant may make
minor modifications to the Building systems without the Landlord's consent), and
(b) such Work is not visible from outside the Premises. Notwithstanding the
foregoing, Landlord may withhold its consent in its sole discretion for any Work
which (a) impacts the base structural components, or, except as permitted above,
the Building systems, (b) is visible from outside the Premises, or (c) would
require penetration of the roof of the Building; provided, however, that
Landlord shall not unreasonably withhold, condition or delay its consent to
installation of additional equipment to support Building systems and services or
to roof penetrations related to the same or to existing equipment installations.
Notwithstanding any provision to the contrary, Tenant shall, at Tenant's cost,
on or before the expiration or sooner termination of the Lease, upon Landlord's
request, return to the condition existing as of the date hereof, any portion of
the Building systems modified by Tenant pursuant to the terms of this Section,
and, as to any improvements or alterations for which Tenant shall have otherwise
obtained Landlord's consent, upon Landlord's request given at the time of its
consent to the Work.
Tenant shall reimburse Landlord for Landlord's reasonable out-of-pocket
costs incurred for review of the plans and all other items submitted by Tenant.
Tenant shall pay for the cost of all Work. All Work shall become the property
of Landlord upon its installation, except for Tenant's trade fixtures and
equipment that does not affect the functionality of Building systems
(collectively, "Trade Fixtures") and for items which Tenant is required
hereunder to remove at Tenant's cost at the termination of the Lease.
The following requirements shall apply to all Work:
(1) Prior to commencement, Tenant shall furnish to Landlord building
permits, certificates of insurance reasonably satisfactory to Landlord.
(2) Tenant shall perform all Work so as to maintain peace and harmony
among other contractors serving the Project and shall avoid interference
with other work to be performed or services to be rendered in the Project.
(3) The Work shall be performed in a good and workmanlike manner,
meeting the standard for construction and quality of materials in the
Building, and shall comply with all insurance requirements and all
applicable governmental laws, ordinances and regulations ("Governmental
Requirements").
(4) Tenant shall perform all Work so as to minimize or prevent
disruption to other tenants of the Project, and Tenant shall comply with
all reasonable requests of Landlord in response to complaints from other
tenants of the Project.
(5) Tenant shall perform all Work in compliance with Tenant's
Contractor Information Program dated January 22, 1997, as the same may be
modified from time to time with Landlord's reasonable approval and with any
additional reasonable
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policies, rules and regulations of Landlord governing contractor conduct in
effect at the time the Work is performed.
(6) Tenant shall permit Landlord to participate in the construction
process, which shall include inviting the Landlord to attend construction
meetings and permitting the Landlord to have a representative at the job
site. If Landlord's employees or contractors perform the Work, Landlord
may charge a supervisory fee not to exceed fifteen percent (15%) of labor,
material, and all other costs of the Work.
(7) Upon completion, Tenant shall furnish Landlord with contractor's
affidavits and full and final statutory waivers of liens, as-built plans
and specifications, and receipted bills covering all labor and materials,
and all other reasonable close-out documentation required by Landlord.
B. Damage to Systems. If any part of the mechanical, electrical or other
systems in the Premises shall be damaged, Tenant shall promptly notify Landlord,
and Landlord shall repair such damage. Landlord may also at any reasonable time
make any repairs or alterations which Landlord deems necessary for the safety or
protection of the Project, or which Landlord is required to make by any court or
pursuant to any Governmental Requirement. Tenant shall at its expense make all
other repairs necessary to keep the Premises in good order, condition and
repair; to the extent Tenant fails to do so, Landlord may make such repairs
itself. The cost of any repairs made by Landlord on account of Tenant's
Default, or on account of the mis-use or neglect by Tenant or its invitees,
contractors or agents anywhere in the Project, shall become Additional Rent
payable by Tenant on demand.
C. No Liens. Tenant has no authority to cause or permit any lien or
encumbrance of any kind to affect Landlord's interest in the Project; any such
lien or encumbrance shall attach to Tenant's interest only. If any mechanic's
lien shall be filed or claim of lien made for work or materials furnished to
Tenant, then Tenant shall at its expense within ten (10) days thereafter either
discharge or contest the lien or claim. If Tenant contests the lien or claim,
then Tenant shall (i) within such ten (10) day period, provide Landlord adequate
security for the lien or claim, (ii) contest the lien or claim in good faith by
appropriate proceedings that operate to stay its enforcement, and (iii) pay
promptly any final adverse judgment entered in any such proceeding. If Tenant
does not comply with these requirements, Landlord may discharge the lien or
claim, and the amount paid, as well as attorney's fees and other expenses
incurred by Landlord, shall become Additional Rent payable by Tenant on demand.
D. Ownership of Improvements. All Work as defined in this Section 5,
partitions, hardware, equipment, machinery and all other improvements and all
fixtures except Trade Fixtures, constructed in the Premises by either Landlord
or Tenant, (i) shall become Landlord's property upon termination or expiration
of the Term without compensation to Tenant, unless Landlord consents otherwise
in writing, and (ii) shall at
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Landlord's option either (a) be surrendered to Landlord with the Premises at
the termination of the Lease or of Tenant's right to possession, or (b),
provided Landlord gives notice to Tenant at the time that its approval of the
Work is granted, be removed in accordance with Subsection 5E below.
E. Removal at Termination. Upon the termination of this Lease or
Tenant's right of possession Tenant shall remove from the Project its Trade
Fixtures, furniture, moveable equipment and other personal property, and any
improvements which Landlord has elected to require Tenant to remove in the
manner prescribed by this Section 5. The term "Trade Fixtures" shall include,
but not be limited to, casework (including shelves, gas valve outlets and
mounted electrical raceways), deionized water systems (including tanks, filter,
pumps and UV light), emergency generator and equipment related switch gear, gas
safety control system and fume hoods (free-standing and mounted), integrated
audio-visual system installed by Tenant, and shall not include such items that
were a part of the Premises prior to the Commencement Date. Tenant shall repair
all damage caused by the removal of any of the foregoing items. If Tenant does
not timely remove such property, then Tenant shall be conclusively presumed to
have, at Landlord's election (i) conveyed such property to Landlord without
compensation or (ii) abandoned such property, and Landlord may dispose of or
store any part thereof in any manner at Tenant's sole cost, without waiving
Landlord's right to claim from Tenant all expenses arising out of Tenant's
failure to remove the property, and without liability to Tenant or any other
person. Landlord shall have no duty to be a bailee of any such personal
property. If Landlord elects abandonment, Tenant shall pay to Landlord, upon
demand, any expenses incurred for disposition.
6. USE OF PREMISES. Tenant shall use the Premises only for general
office, laboratory, research, process and product development and related uses,
including light manufacturing and storage, and, subject to Section 5 hereof and
all applicable zoning codes, incidentally for daycare for employees' children
and employee-related food service. Tenant shall not allow any use of the
Premises which will negatively affect the cost of coverage of Landlord's
insurance on the Project. Tenant shall not allow any use of the Premises which
would cause the value of any part of the Premises to diminish or would interfere
with any other Tenant or with the operation of the Project by Landlord. Tenant
shall not permit any nuisance or waste upon the Premises, or allow any offensive
noise or odor in or around the Premises.
If any governmental authority shall deem the Premises to be a "place of
public accommodation" under the Americans with Disabilities Act or any other
comparable law as a result of Tenant's use, Tenant shall either modify its use
to cause such authority to rescind its designation or be responsible for any
alterations, structural or otherwise, required to be made to the Building or the
Premises under such laws.
7. GOVERNMENTAL REQUIREMENTS AND BUILDING RULES. Tenant shall comply
with all Governmental Requirements applying to its use of the Premises.
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Tenant shall also comply with all reasonable rules established for the Project
from time to time by Landlord. The present rules and regulations are contained
in Appendix B. In the event of any conflict between this Lease and any future
rules of Landlord, the terms of this Lease shall control. Failure by another
tenant to comply with the rules or failure by Landlord to enforce them shall not
relieve Tenant of its obligation to comply with the rules or make Landlord
responsible to Tenant in any way. Landlord shall use reasonable efforts to apply
the rules and regulations uniformly with respect to Tenant and tenants in the
Building under leases containing rules and regulations similar to this Lease. In
the event of alterations and repairs performed by Tenant, Tenant shall comply
with the provisions of Section 5 of this Lease and also Tenant's Contractor
Information Program dated January 22, 1997, as the same may be modified from
time to time with Landlord's reasonable approval, and with any additional
reasonable policies, rules and regulations of the Landlord governing contractor
conduct.
8. WAIVER OF CLAIMS; INDEMNIFICATION; INSURANCE.
A. Indemnification. Tenant shall indemnify, defend and hold harmless
Landlord and its officers, directors, employees and agents against any claim by
any third party for injury to any person or damage to or loss of any property
occurring in the Project and arising from the use of the Premises or from any
other act or omission or negligence of Tenant or any of Tenant's employees or
agents, or from Tenant's breach of its obligations under this Lease. Tenant's
obligations under this section shall include reasonable attorney's fees and
litigation expenses, and shall survive the termination of this Lease. Without
limitation of the foregoing, Tenant agrees that the foregoing indemnity
specifically covers actions brought by its own employees.
Landlord shall indemnify, defend and hold harmless Tenant and its officers,
directors, employees and agents against any claim by any third party for injury
to any person or damage to or loss of any property arising out of damage to
person or Premises or from any other act or omission or negligence of Landlord
or any of Landlord's employees or agents, or from Landlord's breach of its
obligations under this Lease. Landlord's obligations under this section shall
include reasonable attorney's fees and litigation expenses, and shall survive
the termination of this Lease. Without limitation of the foregoing, Landlord
agrees that the foregoing indemnity specifically covers actions brought by its
own employees.
TENANT HEREBY WAIVES ITS IMMUNITY WITH RESPECT TO LANDLORD UNDER THE
INDUSTRIAL INSURANCE ACT (RCW TITLE 51) AND/OR THE LONGSHOREMAN'S AND
HARBORWORKER'S ACT AND/OR ANY EQUIVALENT ACTS AND TENANT EXPRESSLY AGREES TO
ASSUME POTENTIAL LIABILITY FOR ACTIONS BROUGHT AGAINST LANDLORD BY TENANT'S
EMPLOYEES. THIS WAIVER HAS BEEN SPECIFICALLY NEGOTIATED BY THE PARTIES TO THIS
LEASE AND TENANT HAS HAD THE
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OPPORTUNITY TO, AND HAS BEEN ENCOURAGED, TO CONSULT WITH INDEPENDENT COUNSEL
REGARDING THIS WAIVER.
LANDLORD HEREBY WAIVES ITS IMMUNITY WITH RESPECT TO TENANT UNDER THE
INDUSTRIAL INSURANCE ACT (RCW TITLE 51) AND/OR THE LONGSHOREMAN'S AND
HARBORWORKER'S ACT AND/OR ANY EQUIVALENT ACTS AND LANDLORD EXPRESSLY AGREES TO
ASSUME POTENTIAL LIABILITY FOR ACTIONS BROUGHT AGAINST TENANT BY LANDLORD'S
EMPLOYEES. THIS WAIVER HAS BEEN SPECIFICALLY NEGOTIATED BY THE PARTIES TO THIS
LEASE AND LANDLORD HAS HAD THE OPPORTUNITY TO, AND HAS BEEN ENCOURAGED, TO
CONSULT WITH INDEPENDENT COUNSEL REGARDING THIS WAIVER.
B. Tenant's Insurance. Tenant shall maintain the following insurance,
with such higher policy limits as Landlord may reasonably require from time to
time in keeping with industry practices for similar commercial property:
(1) Commercial General Liability Insurance, with (a) Contractual
Liability including the indemnification provisions contained in this Lease,
(b) a severability of interest endorsement, (c) limits of not less than Two
Million Dollars ($2,000,000) combined single limit per occurrence and not
less than Two Million Dollars ($2,000,000) in the aggregate for bodily
injury, sickness or death, and property damage.
(2) Property Insurance against "All Risks" of physical loss covering
the replacement cost of all improvements, fixtures and personal property.
(3) Workers' compensation or similar insurance in form and amounts
required by law, and Employer's Liability with not less than the following
limits:
Each Accident $500,000
Disease--Policy Limit $500,000
Disease--Each Employee $500,000
Tenant's insurance shall be primary and not contributory to that carried by
Landlord, its agents, or mortgagee. Landlord, and if any, Landlord's building
manager or agent shall be named as additional insureds as respects to insurance
required of the Tenant in Section 8C(1). The company or companies writing any
insurance which Tenant is required to maintain under this Lease, as well as the
form of such insurance, shall be subject to Landlord's reasonable approval, and
any such company shall be licensed to do business in the state in which the
Building is located. Such insurance companies shall have a A.M. Best rating of
A VI or better.
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Tenant shall cause any contractor of Tenant performing work on the Premises
to maintain the following insurance, with such higher policy limits as Landlord
may reasonably require from time to time in keeping with industry practices for
similar commercial property:
(1) Commercial General Liability Insurance, including contractor's
liability coverage, contractual liability coverage, completed operations
coverage, broad form property damage endorsement, and contractor's
protective liability coverage, to afford protection with limits, for each
occurrence, of not less than One Million Dollars ($1,000,000) with respect
to personal injury, death or property damage.
(2) Workers' compensation or similar insurance in form and amounts
required by law, and Employer's Liability with not less than the following
limits:
Each Accident $500,000
Disease--Policy Limit $500,000
Disease--Each Employee $500,000
Tenant's contractor's insurance shall be primary and not contributory to
that carried by Tenant, Landlord, their agents or mortgagees. Tenant and
Landlord, and if any, Landlord's building manager or agent, or mortgagee shall
be named as additional insured on Tenant's contractor's insurance policies.
C. Insurance Certificates. Tenant shall deliver to Landlord certificates
evidencing all required insurance no later than five (5) days prior to the
Commencement Date and each renewal date. Each certificate will provide for
thirty (30) days' prior written notice of cancellation to Landlord and Tenant.
D. Landlord's Insurance. Landlord shall maintain "All-Risk" property
insurance at one hundred percent (100%) of replacement cost, including loss of
rents, on the Building and on all improvements and fixtures owned by Landlord,
and Commercial General Liability insurance policies covering Landlord's
liability with respect to the common areas of the Project, each with such terms,
coverages and conditions as are normally carried by reasonably prudent owners of
properties similar to the Project.
E. Notwithstanding any other provision hereof, neither Landlord nor
Tenant shall be liable to the other or to any insurance company (by way of
subrogation or otherwise) insuring the other party for any loss or damage to any
building, structure or tangible personal property of the other or of any third
party occurring in or about the Premises or Building, even though such loss or
damage might have been occasioned by the negligence of such party, its agents or
employees, if such loss or damage would fall within the scope of the party's
fire and extended coverage (all risk) policy of insurance carried or required
herein to be carried. Each party shall obtain from its respective insurer under
each insurance policy it maintains a waiver of all rights of subrogation which
the insurer of one party may have
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against the other party, and Landlord and Tenant shall each indemnify the other
against any loss or expense, including reasonable attorneys' fees, resulting
from the failure to obtain such a waiver.
9. FIRE AND OTHER CASUALTY.
A. Termination. If a fire or other casualty causes substantial damage to
the Building or the Premises, Landlord shall engage a registered architect to
certify within one (1) month of the casualty to both Landlord and Tenant the
amount of time needed to restore the Building and the Premises to tenantability,
using standard working methods. If the time needed exceeds twelve (12) months
from the beginning of the restoration, or two (2) months therefrom if the
restoration would begin during the last twelve (12) months of the Lease, then,
either Landlord or Tenant may terminate this Lease by notice to the other party
given within fifteen (15) days after the notifying party's receipt of the
architect's certificate; provided, however, that as to restoration that would
commence during the last twelve (12) months of the Lease term and require at
least two (2) months but less than twelve (12) months to complete, Landlord's
notice to terminate shall be ineffective if Tenant has timely exercised any
available Extension Option, or if Tenant, within ten (10) days following
Landlord's termination notice, provides Landlord with notice of exercise of any
then available Extension Option. Notwithstanding the foregoing, if flood,
earthquake or other peril for which Landlord is not required by this Lease to
carry, and does not in fact carry, insurance causes damage to the Building or
the Premises for which Landlord's repair costs are reasonably estimated to
exceed $300,000, Landlord may also terminate this Lease by notice to Tenant
given within thirty (30) days from the date of the casualty. The termination
under this paragraph shall be effective thirty (30) days from the date of the
notice and Rent shall be paid by Tenant to that date, with an abatement for any
portion of the Premises which has been untenantable after the casualty.
B. Restoration. If a casualty causes damage to the Building or the
Premises but this Lease is not terminated for any reason, then Landlord shall
diligently restore the Building and the Premises subject to current Governmental
Requirements. Tenant shall replace its damaged improvements, personal property
and fixtures. Rent shall be abated on a per diem basis during the restoration
for any portion of the Premises which is untenantable.
10. EMINENT DOMAIN. If a part of the Project is taken by eminent domain
or deed in lieu thereof which is so substantial that the Premises cannot
reasonably be used by Tenant for the operation of its business in Tenant's
reasonable business judgment, or if any substantial portion of the parking shall
be so taken such that the Premises cannot reasonably be used for the operation
of Tenant's business, then either party may terminate this Lease effective as of
the date of the taking. If any substantial portion of the Project is taken
without affecting the Premises, then Landlord may terminate this Lease as of the
date of such taking. Rent shall abate from the date of the taking in proportion
to any part of the Premises taken. The entire award for a taking of any kind
shall be paid to Landlord, and Tenant shall have no
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right to share in the award except that Tenant shall have the right to any
portion of the award for Tenant's moving costs and Tenant's Fixtures and
personal property. All obligations accrued to the date of the taking shall be
performed by the party liable to perform said obligations, as set forth herein.
11. RIGHTS RESERVED TO LANDLORD.
Landlord may exercise at any time any of the following rights respecting
the operation of the Project without liability to the Tenant of any kind:
A. Name. To change the name or street address of the Building or the
suite number(s) of the Premises.
B. Signs. To install and maintain any project or building identification
signs on the exterior of the Building, and to approve at its sole discretion,
prior to installation, any of Tenant's signs in the Premises visible from the
exterior of the Building. Subject to Landlord's approval and the codes,
ordinances and regulations of the City of Bothell and the Canyon Park Owner's
Association, Tenant shall have the exclusive right to install tenant
identification signage on the existing monument sign (currently identified as
CellPro) which is located on the exterior of the southwest corner of the
building and the right to install tenant identification signage on the Building.
C. Window Treatments. To approve, at its reasonable discretion, prior to
installation, any shades, blinds, ventilators or window treatments of any kind,
as well as any lighting within the Premises that may be visible from the
exterior of the Building.
D. Keys. To retain passkeys for the Premises and all doors within the
Premises.
E. Access. At reasonable times and on reasonable notice to have access
to inspect the Premises, and to perform its obligations, or make repairs,
alterations, additions or improvements, as permitted by this Lease. Landlord
shall observe Tenant's reasonable safety and security procedures and shall use
its reasonable best efforts to comply with the reasonable requirements of
Tenant's Health and Safety Manual (provided that Tenant shall have provided
Landlord with a copy of the same) when entering any area designated by Tenant as
"restricted" for health or safety reasons.
F. Preparation for Reoccupancy. To decorate, remodel, repair, alter or
otherwise prepare the Premises for reoccupancy at any time after Tenant abandons
the Premises, without relieving Tenant of any obligation to pay Rent.
G. Heavy Articles. To approve the weight, size, placement and time and
manner of movement within the Building of any safe, central filing system or
other heavy article of Tenant's property. Tenant shall move its property
entirely at its own risk.
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H. Show Premises. At reasonable times and on reasonable notice to show
the Premises to prospective purchasers, brokers, lenders, rating agencies, and
investors, and to others, in connection with Landlord's legitimate business
interests, and, within the last 12 months of the Term, to prospective tenants,
provided that Landlord gives prior notice to Tenant, complies with the
procedures described in E above, and does not materially interfere with Tenant's
use of the Premises.
I. Relocation of Tenant. Deleted.
J. Use of Lockbox. To designate a lockbox collection agent for
collections of amounts due Landlord. In that case, the date of payment of Rent
or other sums shall be the date of the agent's receipt of such payment or the
date of actual collection if payment is made in the form of a negotiable
instrument thereafter dishonored upon presentment. However, Landlord may reject
any payment for all purposes as of the date of receipt or actual collection by
mailing to Tenant within 21 days after such receipt or collection the amount
sent by Tenant; provided, however, that the foregoing shall not apply to any
payments timely made in full performance of Tenant's obligations under this
Lease inclusive of any full payments made within any applicable cure period. It
is the intent of this provision to prevent waiver of claims for payment as the
result of any partial payments or of any full payments made after any applicable
cure period.
K. Repairs. To make repairs otherwise permitted hereunder or to make
alterations related to Landlord's operation and maintenance of the Project, and
in doing so to transport any required material through the Premises, temporarily
close entrances, doors, corridors, elevators and other facilities in the
Project, temporarily open any ceiling in the Premises, or temporarily suspend
services or use of common areas in the Building; provided, however, that
Landlord shall use its best reasonable efforts to minimize interruption of
Tenant's business activities on the Premises and shall not unreasonably
interfere with Tenant's access to the Premises. Landlord may perform any such
repairs or alterations during ordinary business hours, except that Tenant may
require any Work in the Premises to be done after business hours if Tenant pays
Landlord for overtime and any other expenses incurred. Landlord may do or
permit any work on any nearby building, land, street, alley or way.
L. Landlord's Agents. If Tenant is in Default under this Lease,
possession of Tenant's funds or negotiation of Tenant's negotiable instrument by
any of Landlord's agents shall not waive any breach by Tenant or any remedies of
Landlord under this Lease.
M. Building Services. To install, use and maintain through the Premises,
above its ceilings and within its walls, pipes, conduits, wires and ducts
serving the Building, provided that such installation, use and maintenance does
not unreasonably interfere with Tenant's use of the Premises or the conduct of
Tenant's business activities on the Premises.
N. Other Actions. To take any other action which Landlord deems
reasonable in connection with the operation, maintenance or preservation of the
Building.
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12. TENANT'S DEFAULT.
Any of the following shall constitute a Default by Tenant:
A. Rent Default. Tenant fails to pay any Rent within three (3) days of
written notice that payment has not been received;
B. Other Performance Default. Tenant fails to perform any other
obligation to Landlord under this Lease, and this failure continues for fifteen
(15) days after written notice from Landlord, except that if Tenant begins to
cure its failure within the fifteen (15) day period but cannot reasonably
complete its cure within such period, then, Tenant shall not be in Default so
long as Tenant continues to diligently cure its failure;
C. Credit Default. One of the following credit defaults occurs:
(1) Tenant commences any proceeding under any law relating to
bankruptcy, insolvency, reorganization or relief of debts, or seeks
appointment of a receiver, trustee, custodian or other similar official for
the Tenant or for any substantial part of its property, or any such
proceeding is commenced against Tenant and either remains undismissed for a
period of sixty days or results in the entry of an order for relief against
Tenant which is not fully stayed within fifteen days after entry;
(2) Tenant becomes insolvent or bankrupt, does not generally pay its
debts as they become due, or admits in writing its inability to pay its
debts, or makes a general assignment for the benefit of creditors;
(3) Any third party obtains a levy or attachment under process of law
against Tenant's leasehold interest.
D. Abandonment Default. Tenant abandons the Premises.
13. LANDLORD REMEDIES.
A. Termination of Lease or Possession. If Tenant defaults, Landlord may
elect by notice to Tenant either to terminate this Lease or to terminate
Tenant's possession of the Premises without terminating this Lease. In either
case, Tenant shall immediately vacate the Premises and deliver possession to
Landlord, and Landlord may repossess the Premises and may, at Tenant's sole
cost, remove any of Tenant's signs and any of its other property, without
relinquishing its right to receive Rent or any other right against Tenant.
B. Lease Termination Damages. If Landlord terminates the Lease, Tenant
shall pay to Landlord all Rent due on or before the date of termination, plus
Landlord's reasonable estimate of the aggregate Rent that would have been
payable from the date of termination through the Termination Date, reduced by
the rental value of the Premises calculated as of
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the date of termination for the same period, taking into account anticipated
vacancy prior to reletting, reletting expenses and market concessions, both
discounted to present value at he rate of five percent (5%) per annum. If
Landlord shall relet any part of the Premises for any part of such period before
such present value amount shall have been paid by Tenant or finally determined
by a court, then the amount of Rent payable pursuant to such reletting (taking
into account vacancy prior to reletting and any reletting expenses or
concessions) shall be deemed to be the reasonable rental value for that portion
of the Premises relet during the period of the reletting.
C. Possession Termination Damages. If Landlord terminates Tenant's right
to possession without terminating the Lease and Landlord takes possession of the
Premises itself, Landlord may relet any part of the Premises for such Rent, for
such time, and upon such terms as Landlord in its sole discretion shall
determine, without any obligation to do so prior to renting other vacant areas
in the Building. Any proceeds from reletting the Premises shall first be
applied to the expenses of reletting, including redecoration, repair,
alteration, advertising, brokerage, legal, and other reasonably necessary
expenses. If the reletting proceeds after payment of expenses are insufficient
to pay the full amount of Rent under this Lease, Tenant shall pay such
deficiency to Landlord monthly upon demand as it becomes due. Any excess
proceeds shall be retained by Landlord.
D. Landlord's Remedies Cumulative. All of Landlord's remedies under this
Lease shall be in addition to all other remedies Landlord may have at law or in
equity. Waiver by Landlord of any breach of any obligation by Tenant shall be
effective only if it is in writing, and shall not be deemed a waiver of any
other breach, or any subsequent breach of the same obligation. Landlord's
acceptance of payment by Tenant shall not constitute a waiver of any breach by
Tenant, and if the acceptance occurs after Landlord's notice to Tenant, or
termination of the Lease or of Tenant's right to possession, the acceptance
shall not affect such notice or termination. Acceptance of payment by Landlord
after commencement of a legal proceeding or final judgment shall not affect such
proceeding or judgment. Landlord may advance such monies and take such other
actions for Tenant's account as reasonably may be required to cure or mitigate
any Default by Tenant. Tenant shall immediately reimburse Landlord for any such
advance, and such sums shall bear interest at the default interest rate until
paid.
E. Litigation Costs. Tenant shall pay Landlord's reasonable attorneys'
fees and other costs in enforcing this Lease, whether or not suit is filed.
14. SURRENDER. Upon termination of this Lease or Tenant's right to
possession, Tenant shall return the Premises to Landlord in good order and
condition, ordinary wear and tear and casualty and condemnation damage excepted.
If this Lease requires Tenant to remove any alterations, then Tenant shall
remove the alterations in a good and workmanlike manner and repair any damage to
the Premises resulting from that removal.
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15. HOLDOVER. Tenant shall have no right to holdover possession of the
Premises after the expiration or termination of this Lease without Landlord's
prior written consent, which consent may be withheld in Landlord's sole and
absolute discretion. If Tenant retains possession of any part of the Premises
after the Term, Tenant shall become a month-to-month tenant for the entire
Premises upon all of the terms of this Lease as might be applicable to such
month-to-month tenancy, except that Tenant shall pay all of Base Rent, Operating
Cost Share Rent and Tax Share Rent at 150% the rate in effect immediately prior
to such holdover, computed on a monthly basis for each full or partial month
Tenant remains in possession. If Tenant holds over without the Landlord's prior
written consent, Tenant shall also pay Landlord all of Landlord's direct and
consequential damages. No acceptance of Rent or other payments by Landlord
under these holdover provisions shall operate as a waiver of Landlord's right to
regain possession or any other of Landlord's remedies.
16. SUBORDINATION TO MORTGAGES.
A. Subordination. The Lease is and shall be prior to any mortgage
recorded after the date of the Lease affecting the Building. If, however, a
lender requires that this Lease be subordinate to any mortgage, this Lease shall
be subordinate to that mortgage only if Landlord first obtains from the lender a
written nondisturbance agreement in commercially reasonable form that provides
substantially that as long as Tenant performs its obligations under this Lease,
no foreclosure of, deed given in lieu of foreclosure of, or sale under the
mortgage, and no steps or procedures taken under the mortgage, shall affect
Tenant's rights under this Lease.
Tenant shall attorn to any purchaser at any foreclosure sale, or to any
grantee or transferee designated in any deed given in lieu of foreclosure.
Within twenty (20) days following Landlord's or the mortgagee's request
therefor, Tenant shall execute a written agreement reasonably required by any
lender to accomplish the purposes of this Section.
B. Security Deposit. Any mortgagee shall be responsible for the return
of any security deposit by Tenant only to the extent the security deposit is
received by such ground lessor or mortgagee.
C. Notice and Right to Cure. The Project is subject to any mortgage
identified with name and address of mortgagee in Appendix D to this Lease (as
the same may be amended from time to time by written notice to Tenant). Tenant
agrees to send by registered or certified mail to any mortgagee identified
either in such Appendix or in any later notice from Landlord to Tenant a copy of
any notice of Default sent by Tenant to Landlord. If Landlord fails to cure
such Default within the required time period under this Lease, but mortgagee
begins to cure within ten (10) days after such period and proceeds diligently to
complete such cure, then mortgagee shall have such additional time as is
necessary to complete such cure, including up to forty-five (45) days to obtain
possession if possession is
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necessary to cure, and Tenant shall not begin to enforce its remedies so long as
the cure is being diligently pursued.
D. Definitions. As used in this Section 16, "mortgage" shall include
"deed of trust" and/or "trust deed" and "mortgagee" shall include "beneficiary"
and/or "trustee", and "mortgagee" and "purchaser at a foreclosure sale" shall
include, in each case, all of its successors and assigns, however remote.
17. ASSIGNMENT AND SUBLEASE.
A. In General. Tenant shall not, without the prior consent of Landlord
in each case, (i) make or allow any assignment or transfer, by operation of law
or otherwise, of any part of Tenant's interest in this Lease, (ii) grant or
allow any lien or encumbrance, by operation of law or otherwise, upon any part
of Tenant's interest in this Lease, (iii) sublet any part of the Premises, or
(iv) permit anyone other than Tenant and its employees to occupy any part of the
Premises. Tenant shall remain primarily liable for all of its obligations under
this Lease, notwithstanding any assignment or transfer. No consent granted by
Landlord shall be deemed to be a consent to any subsequent assignment or
transfer, lien or encumbrance, sublease or occupancy. Tenant shall pay all of
Landlord's attorneys' fees and other expenses incurred in connection with any
consent requested by Tenant or in reviewing any proposed assignment or
subletting, not to exceed $1,000. Any assignment or transfer, grant of lien or
encumbrance, or sublease or occupancy without Landlord's prior written consent
shall be void.
B. Landlord's Consent. Landlord will not unreasonably withhold,
condition or delay its consent to any proposed assignment or subletting. It
shall be reasonable for Landlord to withhold its consent to any assignment or
sublease if (i) Tenant is in Default under this Lease, (ii) the financial
responsibility, nature of business, and character of the proposed assignee or
subtenant are not all reasonably satisfactory to Landlord, (iii) in the
reasonable judgment of Landlord the purpose for which the assignee or subtenant
intends to use the Premises (or a portion thereof) is not in keeping with
Landlord's standards for the Building or are in violation of the terms of this
Lease or any other leases in the Project, (iv) the proposed assignee or
subtenant is a government entity, or (v) a proposed assignment is for less than
the entire Premises or for less than the remaining Term of the Lease. The
foregoing shall not exclude any other reasonable basis for Landlord to withhold
its consent.
C. Procedure. Tenant shall notify Landlord of any proposed assignment or
sublease at least thirty (30) days prior to its proposed effective date. The
notice shall include the name and address of the proposed assignee or subtenant,
its corporate affiliates in the case of a corporation and its partners in a case
of a partnership, and sufficient information to permit Landlord to determine the
financial responsibility and character of the proposed assignee or subtenant.
As a condition to any effective assignment of this Lease, the assignee shall
execute and deliver in form reasonably satisfactory to Landlord at least fifteen
(15) days
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prior to the effective date of the assignment, an assumption of all of the
obligations of Tenant under this Lease, as well as an execution copy of the
proposed assignment as soon as possible prior to the effective date. As a
condition to any effective sublease, subtenant shall execute and deliver in form
reasonably satisfactory to Landlord at least fifteen (15) days prior to the
effective date of the sublease, an agreement to comply with all of Tenant's
obligations under this Lease, and, at Landlord's option, an agreement (except
for the economic obligations which subtenant will undertake directly to Tenant)
to attorn to Landlord under the terms of the sublease in the event this Lease
terminates before the sublease expires, as well as an execution copy of the
proposed sublease as soon as possible prior to the effective date.
D. Change of Management or Ownership. Any transfer of the direct or
indirect power to affect the management or policies of Tenant or direct or
indirect change in 25% or more of the ownership interest in Tenant shall
constitute an assignment of this Lease.
E. Tenant Affiliate. Notwithstanding anything in this Section 17 to the
contrary, Tenant may assign this Lease, or sublease all or any part of the
Premises, without Landlord's consent, to any corporation or other entity that
controls, is controlled by or is under common control with Tenant, or to any
corporation or other entity resulting from the reorganization, merger of or
consolidation with Tenant, or to any corporation or entity controlled by any of
the foregoing (collectively, Tenant's Affiliates"). In that case, the Tenant
Affiliate[s] shall assume in writing all of Tenant's obligations under the
Leases. As used in this Paragraph E, and notwithstanding the provisions of
Section 26.C., the term "controlled by" means owned 51% or more by the
controlling entity. Tenant shall provide Landlord with a final execution copy
of the assignment or sublease as soon as practicable.
If Tenant shall assign this Lease or sublet the Premises to a full building
user for consideration in excess of the Rent applicable to the Premises, then
Tenant shall pay to Landlord as Additional Rent 50% of any such excess.
F. Recapture. In the case of an assignment or sublease to a full
building user, other than a Tenant Affiliate or a purchaser of Tenant's business
operations in the Premises, Landlord may, by giving written notice to Tenant
within thirty (30) days after receipt of Tenant's notice of assignment or
subletting, terminate this Lease as of the effective date of the proposed
assignment or sublease and all obligations under this Lease as to such space
shall expire except as to any obligations that expressly survive any termination
of this Lease.
G. Sublease to Seattle Genetics. Landlord consents to a sublease of a
portion of the Premises to Seattle Genetics.
18. CONVEYANCE BY LANDLORD. If Landlord shall at any time transfer its
interest in the Project or this Lease, then to the extent the transferee shall
assume and agree to perform Landlord's obligations under this Lease, Landlord
shall be released of any obligations occurring after such transfer, except the
obligation to return to Tenant any security deposit not delivered to its
transferee, and Tenant shall look solely to Landlord's
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successors for performance of such obligations. This Lease shall not be affected
by any such transfer.
19. ESTOPPEL CERTIFICATE. Each party shall, within twenty (20) days of
receiving a request from the other party, execute, acknowledge in recordable
form, and deliver to the other party or its designee a certificate stating,
subject to a specific statement of any applicable exceptions, that the Lease as
amended to date is in full force and effect, that the Tenant is paying Rent and
other charges on a current basis, and that to the best of the knowledge of the
certifying party, the other party has committed no uncured defaults and has no
offsets or claims. The certifying party may also be required to state the date
of commencement of payment of Rent, the Commencement Date, the Termination Date,
the Base Rent, the current Operating Cost Share Rent and Tax Share Rent
estimates, the status of any improvements required to be completed by Landlord,
the amount of any security deposit, and such other matters as may be reasonably
requested that relate to the status of this Lease. Failure to deliver such
statement within the time required shall be conclusive evidence against the non-
certifying party that this Lease, with any amendments identified by the
requesting party, is in full force and effect, that there are no uncured
defaults by the requesting party, that not more than one month's Rent has been
paid in advance, that the non-certifying party has not paid any security
deposit, and that the non-certifying party has no claims or offsets against the
requesting party.
20. SECURITY DEPOSIT. Tenant shall deposit with Landlord on the date of
this Lease, security for the performance of all of its obligations in the amount
set forth on the Schedule. If Tenant defaults under this Lease, Landlord may
use any part of the Security Deposit to make any defaulted payment, to pay for
Landlord's cure of any defaulted obligation, or to compensate Landlord for any
loss or damage resulting from any Default. To the extent any portion of the
deposit is used, Tenant shall within five (5) days after demand from Landlord
restore the deposit to its full amount. Landlord may keep the Security Deposit
in its general funds and shall not be required to pay interest to Tenant on the
deposit amount. If Tenant shall perform all of its obligations under this Lease
and return the Premises to Landlord at the end of the Term, Landlord shall
return all of the remaining Security Deposit to Tenant within thirty (30) days
after the end of the Term. The Security Deposit shall not serve as an advance
payment of Rent or a measure of Landlord's damages for any Default under this
Lease.
If Landlord transfers its interest in the Project or this Lease, Landlord
may transfer the Security Deposit to its transferee. If the transferee assumes
and agrees to perform Landlord's obligations with respect to the Security
Deposit, then Landlord shall have no further obligation to return the Security
Deposit to Tenant, and Tenant's right to the return of the Security Deposit
shall apply solely against Landlord's transferee.
21. FORCE MAJEURE. Landlord shall not be in default under this Lease to
the extent Landlord is unable to perform any of its obligations on account of
any strike or labor
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problem, energy shortage, governmental pre-emption or
prescription, national emergency, or any other cause of any kind beyond the
reasonable control of Landlord ("Force Majeure").
22. LANDLORD'S DEFAULT. Landlord shall be in default under this Lease if
Landlord fails to perform obligations required of Landlord within a reasonable
time, but in no event less than thirty (30) days after written notice by Tenant
to Landlord and to the holder of any mortgage or deed of trust covering the
Premises whose name and address have been furnished to Tenant in writing.
Tenant's notice shall describe the nature of Landlord's failure to perform. If
the nature of Landlord's obligation is such that more than thirty (30) days are
required for performance then Landlord shall not be in default if Landlord
commences performance within the thirty (30) day period after Tenant's notice
and thereafter diligently prosecutes the same to completion. In the event
Landlord fails to cure or commence cure within the periods described in this
Section 22, or Landlord's mortgagee or deed of trust holder fails to cure or to
commence cure within the periods described in Section 16.C., and Landlord's
default materially impairs Tenant's ability to conduct its permitted business in
the Premises, then Tenant may (but shall not be obligated to) perform the
obligation of Landlord, and the reasonable cost of that performance shall be
payable from Landlord to Tenant upon demand. Notwithstanding anything herein to
the contrary, if Landlord fails to timely pay to Tenant sums that are due to
Tenant under this Section 22, the unpaid amounts may at Tenant's election be
offset against Rent next falling due under the terms of this Lease; provided,
however, that unless Tenant shall have obtained a final judgment against
Landlord for said amounts, Tenant may not offset against Rent more than
$100,000.00 during any calendar year.
23. NOTICES. All notices, consents, approvals and similar communications
to be given by one party to the other under this Lease, shall be given in
writing, mailed, sent by facsimile or personally delivered as follows:
A. Landlord. To Landlord as follows:
CarrAmerica Realty Corporation
10785 Willows Road NE, Suite 250
Redmond, Washington 98052
Attn: Market Officer
425.558.2245 phone
425.558.2246 fax
with a copy to:
CarrAmerica Realty Corporation
1850 K Street, NW, Suite 500
Washington, D.C. 20006
Attn: Lease Administration
PAGE 26
<PAGE>
or to such other person at such other address as Landlord may designate by
notice to Tenant.
B. Tenant. To Tenant as follows:
ICOS Corporation
22021 20th Avenue SE
Bothell, WA 98021-4406
Attn: Glen Bodman
425.485.1900 ext. 2227 (phone)
425 481.8305 (fax)
or to such other person at such other address as Tenant may designate by notice
to Landlord.
Mailed notices shall be sent by United States certified or registered mail,
or by a reputable national overnight courier service, postage prepaid. Mailed
notices shall be deemed to have been given on the earlier of actual delivery or
three (3) business days after posting in the United States mail in the case of
registered or certified mail, and one business day in the case of overnight
courier. Notices sent by facsimile shall be deemed to have been given on the
business day next occurring after the day on which receipt of the facsimile has
been confirmed.
24. QUIET POSSESSION. So long as Tenant shall perform all of its
obligations under this Lease, Tenant shall enjoy peaceful and quiet possession
of the Premises against any party claiming through the Landlord.
25. REAL ESTATE BROKER. Tenant represents to Landlord that Tenant has not
dealt with any real estate broker with respect to this Lease, and no broker is
in any way entitled to any broker's fee or other payment in connection with this
Lease. Tenant shall indemnify and defend Landlord against any claims by any
other broker or third party for any payment of any kind in connection with this
Lease.
26. MISCELLANEOUS.
A. Successors and Assigns. Subject to the limits on Tenant's assignment
contained in Section 17 and on Landlord's conveyance contained in Section 18,
the provisions of this Lease shall be binding upon and inure to the benefit of
all successors and assigns of Landlord and Tenant.
B. Date Payments Are Due. Except for payments to be made by Tenant under
this Lease which are due upon demand or are due in advance (such as Base Rent),
Tenant shall pay to Landlord any amount for which Landlord renders a statement
of account within forty-five (45) days of Tenant's receipt of Landlord's
statement.
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<PAGE>
C. Meaning of "Landlord", "Re-Entry, "including" and "Control." Subject
to Section 18 hereof, the term "Landlord" means only the owner of the Project
and the lessor's interest in this Lease from time to time. The words "re-entry"
and "re-enter" are not restricted to their technical legal meaning. The words
"including" and similar words shall mean "without limitation." "Control" shall
mean the power directly or indirectly, by contract or otherwise, to direct the
management and policies of the applicable entity.
D. Time of the Essence. Time is of the essence of each provision of this
Lease.
E. No Option. This document shall not be effective for any purpose until
it has been executed and delivered by both parties; execution and delivery by
one party shall not create any option or other right in the other party.
F. Severability. The unenforceability of any provision of this Lease
shall not affect any other provision.
G. Governing Law. This Lease shall be governed in all respects by the
laws of the state in which the Project is located, without regard to the
principles of conflicts of laws.
H. Attorneys' Fees. If either party breaches this Lease or defaults in
its obligations to the other, it shall reimburse to the other, upon demand, any
costs or expenses incurred by the nonbreaching party in connection with the
breach or default, whether or not suit is commenced. Such costs shall include
reasonable legal fees and costs. If any action for breach of, or to enforce the
provisions of, this Lease is commenced, the court shall award to the prevailing
party a reasonable sum as attorneys' fees and costs.
I. No Oral Modification. No modification of this Lease shall be
effective unless it is a written modification signed by both parties.
J. Landlord's Right to Cure. In the case of an emergency, following such
notice and opportunity to cure, if any, as may be reasonable, and otherwise
following applicable notice and opportunity to cure, Landlord may cure any
default by Tenant. Any expenses incurred shall become Additional Rent due from
Tenant on demand by Landlord.
K. Captions. The captions used in this Lease shall have no effect on the
construction of this Lease.
L. Authority. Landlord and Tenant each represents to the other that it
has full power and authority to execute and perform this Lease.
M. Landlord's Enforcement of Remedies. Landlord may enforce any of its
remedies under this Lease either in its own name or through an agent.
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<PAGE>
N. Entire Agreement. This Lease, together with all Appendices,
constitutes the entire agreement between the parties. No representations or
agreements of any kind have been made by either party which are not contained in
this Lease.
O. Landlord's Title. Landlord's title shall always be paramount to the
interest of the Tenant, and nothing in this Lease shall empower Tenant to do
anything which might in any way impair Landlord's title.
P. Light and Air Rights. Landlord does not grant in this Lease any
rights to light and air in connection with Project. Landlord reserves to
itself, the Land, the Building below the improved floor of each floor of the
Premises, the Building above the ceiling of each floor of the Premises, the
exterior of the Premises and the areas on the same floor outside the Premises,
along with the areas within the Premises required for the installation and
repair of utility lines and other items required to serve other tenants of the
Building.
Q. Singular and Plural. Wherever appropriate in this Lease, a singular
term shall be construed to mean the plural where necessary, and a plural term
the singular. For example, if at any time two parties shall constitute
Landlord or Tenant, then the relevant term shall refer to both parties together.
R. No Recording by Tenant; Memorandum of Lease. Tenant shall not record
in any public records any portion of this Lease. Upon request of Tenant,
Landlord shall execute, acknowledge and deliver to Tenant a reasonable
memorandum of this Lease in recordable form, which Tenant shall have the right
to record in the public records of King County, Washington.
S. Exclusivity. Landlord does not grant to Tenant in this Lease any
exclusive right except the right to occupy its Premises.
T. No Construction Against Drafting Party. The rule of construction that
ambiguities are resolved against the drafting party shall not apply to this
Lease.
U. Survival. All obligations of Landlord and Tenant under this Lease
shall survive the termination of this Lease.
V. Rent Not Based on Income. No rent or other payment in respect of the
Premises shall be based in any way upon net income or profits from the Premises.
Tenant may not enter into or permit any sublease or license or other agreement
in connection with the Premises which provides for a rental or other payment
based on net income or profit.
W. Building Manager and Service Providers. Landlord may perform any of
its obligations under this Lease through its employees or third parties hired by
the Landlord.
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<PAGE>
X. Late Charge and Interest on Late Payments. Without limiting the
provisions of Section 12A, if Tenant fails to pay any installment of Rent or
other charge to be paid by Tenant pursuant to this Lease within five (5)
business days after the same becomes due and payable, then Tenant shall pay a
late charge equal to the greater of five percent (5%) of the amount of such
payment or $250. In addition, interest shall be paid by Tenant to Landlord on
any payments of Rent not paid within five (5) business days after the same
becomes due and payable from the date due until paid at the rate provided in
Section 2D(2). Such late charge and interest shall constitute Additional Rent.
Y. Tenant's Financial Statements. Within ten (10) days after Landlord's
written request therefor, Tenant shall deliver to Landlord the current annual
and quarterly financial statements of Tenant, and annual financial statements of
the two (2) years prior to the current year's financial statements, and
including a balance sheet and profit and loss statement.
Z. Parking. Landlord grants to Tenant and Tenant's customers, suppliers,
employees and invitees, a non-exclusive, irrevocable license for the Term of
this Lease to use vehicle parking spaces within the area shown on the attached
Appendix A, at no additional cost, as set forth in Appendix B, Rules and
Regulations, paragraph 28 for use of motor vehicles. Landlord reserves the right
at any time to grant similar non-exclusive use to other tenants of the Project,
to promulgate reasonable rules and regulations relating to the use of such
parking areas, including reasonable restrictions on parking by tenants and
employees, to make changes in the parking layout from time to time, to establish
reasonable time limits on parking, and temporarily to close off parking areas as
may be reasonably necessary perform maintenance and repair of the same, or to
prevent a public dedication of the same.
27. UNRELATED BUSINESS INCOME. If Landlord is advised by its counsel at
any time that any part of the payments by Tenant to Landlord under this Lease
may be characterized as unrelated business income under the United States
Internal Revenue Code and its regulations, then Tenant shall enter into any
amendment proposed by Landlord to avoid such income, so long as the amendment
does not require Tenant to make more payments or accept fewer services from
Landlord, than this Lease provides, or otherwise impose any greater burden on
Tenant or deprive Tenant of any material right under this Lease.
28. HAZARDOUS SUBSTANCES. Except for those Hazardous Substances
reasonably related to Tenant's permitted business operations in the Premises,
Tenant shall not cause or permit any Hazardous Substances to be brought upon,
produced, stored, used, discharged or disposed of in or near the Project. Any
and all such Hazardous Substances shall be produced, stored, used, discharged
and disposed of in full compliance with all applicable laws, rules, regulations,
and requirements of governmental authorities having jurisdiction. "Hazardous
Substances" include those hazardous substances described in the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, 42
U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as
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<PAGE>
amended, 42 U.S.C. Section 6901 et seq., any other applicable federal, state or
local law, and the regulations adopted under these laws. Tenant hereby agrees
that it will be fully liable for all costs and expenses related to its
production, use, storage, discharge or disposal of Hazardous Substances on or
about the Premises or the Project, including any cleanup costs, fines or
penalties. Tenant shall give Landlord immediate notice of any violation of the
requirements of this Section 28, as well as copies of any notices of violation
received by Tenant from any third party. At the request of Landlord, Tenant
shall provide Landlord with the names and approximate amounts of the Hazardous
Substances that Tenant has used and stored on or about the Premises, as well as
copies of governmental reports prepared by or on behalf of Tenant in connection
with such Hazardous Substances and other information as Landlord may reasonably
request from time to time regarding Tenant's use and storage of Hazardous
Substances.
29. EXCULPATION. Landlord shall have no personal liability under this
Lease; its liability shall be limited to its interest in the Project, and shall
not extend to any other property or assets of the Landlord. In no event shall
any officer, director, employee, agent, shareholder, partner, member or
beneficiary of Landlord be personally liable for any of Landlord's obligations
hereunder.
30. ATTACHMENTS. The following attachments to this Lease are incorporated
into and made a part of it by this reference:
<TABLE>
<S> <C>
Appendix A - Plan of the Premises
Appendix B - Rules and Regulations
Appendix C - Tenant Improvement Agreement
Appendix D - Mortgages Affecting the Project
Appendix E - Commencement Date Confirmation
Appendix F - Legal Description
Addendum 1 - Extension Option
</TABLE>
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease.
Landlord:
CARRAMERICA REALTY CORPORATION a Maryland corporation
By: /s/ Philip L. Hawkins
----------------------------------------
Name: Philip L. Hawkins
-----------------------------------
Title: Chief Operating Officer
----------------------------------
Tenant:
ICOS CORPORATION, a Delaware corporation
By: /s/ Gary Wilcox
-----------------------------------------
Name: Gary Wilcox
------------------------------------
Title: EVP, Operations
-----------------------------------
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<PAGE>
EXHIBIT 10.10
DISTRICT OF COLUMBIA )
) ss.
)
On this 12th day of January, 1999, before me, the undersigned, a Notary
Public in and for the District of Columbia, duly commissioned and sworn,
personally appeared Philip L. Hawkins, to me known to be the person who signed
as Chief Operating Officer of CARRAMERICA REALTY CORPORATION, a Maryland
corporation that executed the within and foregoing instrument, and acknowledged
said instrument to be the free and voluntary act and deed of said corporation
for the uses and purposes therein mentioned, and on oath stated that I was duly
elected, qualified and acting as said officer of the corporation, that I was
authorized to execute said instrument and that the seal affixed, if any, is the
corporate seal of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and official seal the day
and year first above written.
/s/ Alice Anne Arth
----------------------------------------------
(Signature of Notary)
Alice Anne Arth
----------------------------------------------
(Print or stamp name of Notary)
NOTARY PUBLIC in and for the District of Columbia,
residing at Washington, D.C.
My appointment expires: April 30, 2003
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<PAGE>
STATE OF WASHINGTON )
) ss.
COUNTY OF SNOHOMISH )
On this 7th day of January, 1999, before me, the undersigned, a Notary
Public in and for the State of Washington, duly commissioned and sworn,
personally appeared Gary Wilcox, to me known to be the person who signed as
Executive VP/Operations of ICOS CORPORATION, a Delaware corporation that
executed the within and foregoing instrument, and acknowledged said instrument
to be the free and voluntary act and deed of said corporation for the uses and
purposes therein mentioned, and on oath stated that I was duly elected,
qualified and acting as said officer of the corporation, that I was authorized
to execute said instrument and that the seal affixed, if any, is the corporate
seal of said corporation.
IN WITNESS WHEREOF I have hereunto set my hand and official seal the day
and year first above written.
/s/ Rene J. Gipson
----------------------------------------------
(Signature of Notary)
Rene J. Gipson
----------------------------------------------
(Print or stamp name of Notary)
NOTARY PUBLIC in and for the State
of Washington, residing at Bothell.
My appointment expires: 10-19-00.
PAGE 34
<PAGE>
APPENDIX A
Plan of the Premises and the Project
(attach floor plan depicting the Premises)
PAGE 1
<PAGE>
APPENDIX B
Rules and Regulations
1. Tenant shall not place anything, or allow anything to be placed near
the glass of any window, door, partition or wall which may, in Landlord's
reasonable judgment, appear unsightly from outside of the Project.
2. The Project directory shall be available to Tenant solely to display
names and their location in the Project, which display shall be as directed by
Landlord.
3. The sidewalks, halls, passages, exits, entrances, elevators and
stairways shall not be obstructed by Tenant or used by Tenant for any purposes
other than for ingress to and egress from the Premises. Tenant shall lend its
full cooperation to keep such areas free from all obstruction and in a clean and
sightly condition and shall move all supplies, furniture and equipment as soon
as received directly to the Premises and move all such items and waste being
taken from the Premises (other than waste customarily removed by employees of
the Building) directly to the shipping platform at or about the time arranged
for removal therefrom. The halls, passages, exits, entrances, elevators,
stairways, balconies and roof are not for the use of the general public and
Landlord shall, in all cases, retain the right to control and prevent access
thereto by all persons whose presence in the judgment of Landlord, reasonably
exercised, shall be prejudicial to the safety, character, reputation and
interests of the Project. Neither Tenant nor any employee or invitee of Tenant
shall go upon the roof of the Project, except as expressly permitted in the
Lease.
4. The toilet rooms, urinals, wash bowls and other apparatuses shall not
be used for any purposes other than that for which they were constructed, and no
foreign substance of any kind whatsoever shall be thrown therein, and to the
extent caused by Tenant or its employees or invitees, the expense of any
breakage, stoppage or damage resulting from the violation of this rule shall be
borne by Tenant.
5. Tenant shall not use the Premises for housing, lodging or sleeping
purposes; or permit preparation or warming of food in the Premises (warming of
coffee and individual meals with employees and guests excepted, and except as
permitted in Section 6 of the Lease).
6. Tenant shall not bring upon, use or keep in the Premises or the Project
any kerosene, gasoline or inflammable or combustible fluid or material, except
as needed in connection with Tenant's permitted use, or use any portable or
temporary method of heating or air conditioning other than that supplied or
otherwise approved by Landlord.
7. Subject to Landlord's reasonable approval, Tenant may install a
unified, electromagnetic locking system in the Premises. No additional locks or
bolts shall otherwise
PAGE 1
<PAGE>
be placed upon any doors, windows or transoms in or to the
Premises without the Landlord's consent. Tenant shall not change existing locks
or the mechanism thereof. Upon termination of the lease, Tenant shall deliver
to Landlord all keys and passes for offices, rooms, parking lot and toilet rooms
which shall have been furnished Tenant.
8. Without the prior written consent of Landlord, Tenant shall not use the
name of the Project or any picture of the Project in connection with, or in
promoting or advertising the business of, Tenant, except Tenant may use the
address of the Project as the address of its business.
9. Tenant shall cooperate fully with Landlord to assure the most effective
operation of the Premises' or the Project's heating and air conditioning.
10. Tenant assumes full responsibility for protecting the Premises from
theft, robbery and pilferage, which may arise from a cause other than Landlord's
negligence, which includes keeping doors locked and other means of entry to the
Premises closed and secured.
11. Peddlers, solicitors and beggars shall be reported to the office of
the Project or as Landlord otherwise requests.
12. Tenant shall not advertise the business, profession or activities of
Tenant conducted in the Project in any manner which violates the letter or
spirit of any code of ethics adopted by any recognized association or
organization pertaining to such business, profession or activities.
13. No vehicle and no pets shall be allowed in the Premises, halls,
freight docks, or any other parts of the Building except that blind persons may
be accompanied by "seeing eye" dogs. Tenant shall not make or permit any noise,
vibration or odor to emanate from the Premises, or do anything therein tending
to create, or maintain, a nuisance, or do any act tending to injure the
reputation of the Building.
14. Tenant shall not do or permit the manufacture, sale, purchase, use or
gift of any fermented, intoxicating or alcoholic beverages without obtaining
written consent of Landlord.
15. Tenant shall not disturb the quiet enjoyment of any other tenant.
16. Landlord may place and keep on the windows and doors of the Premises
during the last twelve (12) months of the Lease term signs advertising the
Premises for Rent.
17. No equipment, mechanical ventilators, awnings, special shades or other
forms of window covering shall be permitted either inside or outside the windows
of the Premises without the prior written consent of Landlord, and then only at
the expense and risk of Tenant, and they shall be of such shape, color,
material, quality, design and make as may be approved by Landlord.
PAGE 3
<PAGE>
18. Tenant shall not during the term of this Lease canvas or solicit other
tenants of the Building for any purpose.
19. Tenant shall not install or operate any phonograph, musical or sound-
producing instrument or device, radio receiver or transmitter, TV receiver or
transmitter, or similar device in the Building, except in connection with
Tenant's permitted use of the Premises. Tenant shall not install or operate any
antenna, aerial, wires or other equipment inside or outside the Building, nor
operate any electrical device from which may emanate electrical waves which may
interfere with or impair radio or television broadcasting or reception from or
in the Building or elsewhere, without in each instance the prior written
approval of Landlord. The use thereof, if permitted, shall be subject to
control by Landlord to the end that others shall not be disturbed.
20. Tenant shall promptly remove all rubbish and waste from the Premises.
21. Tenant shall not exhibit, sell or offer for sale, rent or exchange in
the Premises or at the Project any article, thing or service, except those
ordinarily embraced within the use of the Premises specified in Section 6 of
this Lease, without the prior written consent of Landlord.
22. Tenant shall not overload any floors in the Premises or any public
corridors or elevators in the Building.
23. Tenant shall not do any painting in the Premises, or mark, paint, cut
or drill into, drive nails or screws into, or in any way deface the exterior of
the Building, without the prior written consent of Landlord.
24. Whenever Landlord's consent, approval or satisfaction is required
under these Rules, then unless otherwise stated, any such consent, approval or
satisfaction must be obtained in advance, such consent or approval may be
granted or withheld in Landlord's sole discretion, and Landlord's satisfaction
shall be determined in its sole judgment.
25. Tenant and its employees shall cooperate in all fire drills conducted
by Landlord in the Building. Landlord shall reasonably coordinate with Tenant
any planned fire drills.
26. Tenant and its employees shall cooperate with the following parking
requirements:
(a) Tenant shall not park or permit the parking of vehicles in any
parking areas designated by Landlord as areas for parking by visitors to the
Project.
(b) No overnight or extended term storage of vehicles shall be
permitted, except for occasional overnight use in connection with Tenant's
business activities.
PAGE 3
<PAGE>
(c) Vehicles must be parked entirely within painted stall lines of a
single parking stall.
(d) All directional signs and arrows must be observed.
(e) Parking is prohibited in areas not striped for parking (except as
may be reasonably approved by Landlord), in aisles, where "no parking" signs are
posted, and in such other areas as may be designated by Landlord or Landlord's
Parking Operator.
(f) Every driver is required to park and lock his own vehicle. All
responsibility for damage to vehicles is assumed by the driver.
(g) Washing, waxing, cleaning or servicing of any vehicle in any area
not specifically reserved for such purpose is prohibited.
(h) Landlord reserves the right to modify and/or adopt such other
reasonable and non-discriminatory rules and regulations for the parking
facilities as it deems necessary for the operation of the parking facilities.
Landlord may refuse to permit any person who violates these rules to park in the
parking facilities, and any violation of the rules shall subject the car to
possible removal.
(i) Landlord shall not charge parking fees.
PAGE 4
<PAGE>
APPENDIX C
Tenant Improvement Agreement
NONE
PAGE 1
<PAGE>
APPENDIX D
Mortgages Currently Affecting the Project
NONE
PAGE 1
<PAGE>
APPENDIX E
Commencement Date Confirmation
(sample only - not for execution)
Landlord: CarrAmerica Realty Corporation, a Maryland corporation
Tenant: ICOS Corporation, a Delaware corporation
This Commencement Date Confirmation is made by Landlord and Tenant pursuant
to that certain Lease dated as of _________, 199__ (the "Lease") for certain
premises known as Canyon Park East, Building D (the "Premises"). This
Confirmation is made pursuant to Item 9 of the Schedule to the Lease.
1. Lease Commencement Date, Termination Date. Landlord and Tenant hereby
agree that the Commencement Date of the Lease is January 7, 1999, and the
Termination Date of the Lease is January 31, 2004.
2. Acceptance of Premises. Tenant has inspected the Premises and affirms
that the Premises is acceptable in all respects in its current "as is"
condition.
3. Incorporation. This Confirmation is incorporated into the Lease, and
forms an integral part thereof. This Confirmation shall be construed and
interpreted in accordance with the terms of the Lease for all purposes.
Tenant:
ICOS CORPORATION, a Delaware corporation
By:
-----------------------------------
Name:
-----------------------------
Title:
-----------------------------
Landlord:
CARRAMERICA REALTY CORPORATION a Maryland corporation
By:
-----------------------------------
Name:
-----------------------------
Title:
-----------------------------
PAGE 1
<PAGE>
APPENDIX F
Legal Description
LEGAL DESCRIPTION
Building D
22215 26th Avenue SE
Bothell, WA
That portion of Tract 29 of that Binding Site Plan record of survey record of
survey recorded under Auditor's File No. 8811175001 being in Section 29,
Township 27 North, Range 5 East, W.M., in Snohomish County, Washington,
described as follows:
Commencing at the Northwest corner of said Tract 29;
thence South 89 degrees, 49 minutes, 18 seconds East along the North line
thereof 305.46 feet;
thence South 1 degree, 47 minutes, 30 seconds East 436.83 feet to the point of
curve of a 739.50 foot radius curve to the left;
thence Southerly along said curve, through a central angle of 14 degrees, 40
minutes, 39 seconds, an arc distance of 189.44 feet to a point of tangency;
thence South 16 degrees, 28 minutes, 09 seconds East 90.33 feet to the True
Point of Beginning;
thence continuing South 16 degrees, 28 minutes, 09 seconds East 127.23 feet to
the point of curve of a 969.50 foot radius curve to the left;
thence Southerly along said 969.50 foot radius curve, through a central angle of
29 degrees, 23 minutes, 44 seconds, an arc distance of 497.40 feet, to a point
of compound curvature with a 50.00 foot radius curve to the left;
thence Southerly and Easterly along said 50.00 foot radius curve, through a
central angel of 94 degrees, 40 minutes, 43 seconds, an arc distance of 54.26
feet to a point of tangency;
thence North 39 degrees, 27 minutes, 26 seconds East 2.53 feet to the Easterly
line of said Tract 29;
thence North 30 degrees, 50 minutes, 37 seconds West, along said Easterly line
18.44 feet;
thence North 27 degrees, 10 minutes, 56 seconds West, along said Easterly line
36.12 feet;
thence North 31 degrees, 42 minutes, 58 seconds East, along said Easterly line
26.57 feet;
thence North 18 degrees, 04 minutes, 52 seconds East, along said Easterly line
66.26 feet;
thence North 15 degrees, 38 minutes, 12 seconds East, along said Easterly line
58.86 feet;
thence North 8 degrees, 51 minutes, 00 seconds East, along said Easterly line
81.17 feet;
thence North 5 degrees, 52 minutes, 00 seconds East, along said Easterly line
89.63 feet;
thence North 24 degrees, 19 minutes, 32 seconds West, along said Easterly line
69.22 feet;
continued Thence North 1 degree, 24 minutes, 18 seconds West, along said
Easterly line 73.34 feet;
thence North 12 degrees, 30 minutes, 15 seconds West, along said Easterly line
87.09 feet to a point which bears North 83 degrees, 03 minutes, 52 seconds East
from the True Point of Beginning;
thence South 83 degrees, 03 minutes, 52 seconds West 365.30 feet to the True
Point of Beginning.
PAGE 2
<PAGE>
ADDENDUM 1
Extension Option
EXTENSION OPTION. Subject to Subsection B below, Tenant may at its option
extend the Term of this Lease for three (3) successive periods of five (5) years
each. Such periods are called "Renewal Terms". The Renewal Terms shall be upon
the same terms contained in this Lease except for the payment of Base Rent
during the Renewal Terms; and any reference in the Lease to the "Term" of the
Lease shall be deemed to include any Renewal Term and apply thereto, unless it
is expressly provided otherwise. Tenant shall have no additional extension
options.
A. The Base Rent during a Renewal Term shall be the greater of (i) the
Base Rent applicable to the last day of the final Lease Year prior to the
applicable Renewal Term, or (ii) the Market Rate (defined hereinafter) for such
space for a term commencing on the first day of the Renewal Term. "Market Rate"
shall mean the then prevailing market rate for a comparable renewal term (taking
into account whether any commissions will be payable by Landlord to any Tenant
broker or agent) commencing on the first day of the Renewal Term for tenants of
comparable size and creditworthiness for comparable space in the Building and
other first class office buildings in the vicinity of the Building.
B. To exercise any option, Tenant must deliver a binding notice to
Landlord not less than nine (9) months prior to the expiration of the initial
Term of this Lease, or the then-current Renewal Term, as the case may be.
Thereafter, the Market Rate for the Renewal Term shall be calculated pursuant to
Subsection C below. If Tenant fails to timely give its notice of exercise,
Tenant will be deemed to have waived its option to extend, time being of the
essence hereof.
C. Market Rate shall be determined as follows:
(i) If Tenant provides Landlord with its binding notice of exercise
pursuant to Subsection B above, then at some point between nine (9) and six (6)
months prior to the commencement of the applicable Renewal Term, Landlord shall
calculate and inform Tenant of the Market Rate. If Tenant rejects the Market
Rate as calculated by Landlord, Tenant shall inform Landlord of its rejection
within twenty-one (21) days after Tenant's receipt of Landlord's calculation,
and Landlord and Tenant shall commence negotiations to agree upon the Market
Rate. If Tenant fails to timely reject Landlord's calculation of the Market
Rate it will be deemed to have accepted such calculation. If Landlord and
Tenant are unable to reach agreement within twenty-one (21) days after
Landlord's receipt of Tenant's notice of rejection, then the Market Rate shall
be determined in accordance with (ii) below.
(ii) If Landlord and Tenant are unable to reach agreement on the
Market Rate within said twenty-one (21) day period, then within seven (7) days,
Landlord and
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<PAGE>
Tenant shall each simultaneously submit to the other in a sealed
envelope its good faith estimate of the Market Rate. If the higher of such
estimates is not more than one hundred five percent (105%) of the lower, then
the Market Rate shall be the average of the two. Otherwise, the dispute shall
be resolved by arbitration in accordance with (iii) below.
(iii) Within seven (7) days after the exchange of estimates, the
parties shall select as an arbitrator an independent MAI appraiser with at least
ten (10) years of experience in appraising office space in the metropolitan area
in which the Project is located (a "Qualified Appraiser"). If the parties cannot
agree on a Qualified Appraiser, then within a second period of seven (7) days,
each shall select a Qualified Appraiser and within ten (10) days thereafter the
two appointed Qualified Appraisers shall select a third Qualified Appraiser and
the third Qualified Appraiser shall be the sole arbitrator. If one party shall
fail to select a Qualified Appraiser within the second seven (7) day period,
then the Qualified Appraiser chosen by the other party shall be the sole
arbitrator.
(iv) Within twenty-one (21) days after submission of the matter to the
arbitrator, the arbitrator shall determine the Market Rate by choosing whichever
of the estimates submitted by Landlord and Tenant the arbitrator judges to be
more accurate. The arbitrator shall notify Landlord and Tenant of its decision,
which shall be final and binding. If the arbitrator believes that expert advice
would materially assist him or her, the arbitrator may retain one or more
qualified persons to provide expert advice. The fees of the arbitrator and the
expenses of the arbitration proceeding, including the fees of any expert
witnesses retained by the arbitrator, shall be paid by the party whose estimate
is not selected. Each party shall pay the fees of its respective counsel and
the fees of any witness called by that party.
D. Tenant's option to extend this Lease is subject to the condition that
on the date that Tenant delivers its binding notice exercising an option to
extend, Tenant is not in Default under this Lease after the expiration of any
applicable notice and cure periods.
PAGE 2
<PAGE>
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
ICOS Corporation:
We consent to incorporation by reference in the registration statements (Nos.
33-48401, 33-80680, 33-64762 and 333-08485) on Form S-8 of ICOS Corporation of
our report dated January 15, 1999, relating to the consolidated balance sheets
of ICOS Corporation and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998
annual report on Form 10-K of ICOS Corporation.
/S/ KPMG LLP
Seattle, Washington
March 29, 1999
49
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